Economic Crisis Is the State’s Oxygen

– March 9, 2020 Reading Time: 5 minutes

Investment powers economic growth. Period. If this statement of the obvious triggers certain readers, it’s probably best for the sensitive to stop reading now.

For those not offended by the obvious, it should be said that we all have endless consumptive desires. But as individuals we all know that those desires can’t be fulfilled absent production first. Consumption is a consequence of production, and investment powers production. The more investment in our capacity to produce the more resources boosting our ability to produce, at which point our ability to consume soars.

Before tractors and fertilizer wrought by intrepid investment, most consumed very little. They did because so much of their effort was directed – often unsuccessfully – toward the mere creation of food. Thank goodness for investment. It freed people from the most menial of work that enabled microscopic amounts of consumption.

Looked at more broadly, the innovative, life-altering, growth-boosting businesses in the economy are almost invariably a consequence of wildly courageous, risk-ignoring investment. Very occasionally these bold capital allocations lead to wondrous surprises. General Electric was once just that. GE came to be because an oddball inventor by the name of Thomas Edison found a rich banking heir by the name of J.P. Morgan who rather uniquely thought the lightbulb had promise. Morgan was rich, hence he had money to lose on something that thoroughly transformed living standards for the better, but that few believed would.

Looked at modernly, that’s why a dollar in Michael Bloomberg’s pocket is exponentially more growth-stimulative than a dollar in yours or mine. Bloomberg has money to lose. He can take huge investment risks. Goodness, he just lost $570 million on a presidential campaign. The wealth of the staggeringly rich is the most important wealth of all. Period. That is so precisely because the wealth of the rich can be directed to the riskiest of ventures that almost never bear fruit, but that boost productivity and living standards remarkably when they do.

Which brings us to Jason Furman’s typically obtuse opinion piece in the Wall Street Journal last week, titled “The Case for a Big Coronavirus Stimulus.” Actually Mr. Furman, it’s your case. Not the case. The passably sentient among us wonder if there is a case. Needless to say, the coronavirus scare has given life to a policy crowd ever eager to centrally plan good outcomes.

In Furman’s case, one supposes that the Harvard professor, because he’s a Harvard professor, can afford to be ridiculous. Tenure is cushy. Unfortunately, op-eds don’t create economic growth. Furman’s would bring on the opposite of growth. Readers might consider this when wondering why equity markets remain volatile. Though coronavirus is priced, what the governing class will do in response isn’t. Political action is all a speculation. Though Furman is Barack Obama’s former CEA head, it’s possible investors fear the Republicans (and governments around the world) coming up with stimulus ideas similar to Furman’s. If so, markets would logically discount what has nothing to do with growth, and realistically has a lot to do with slower growth, in negative fashion.

First off, Furman observed that “the lower interest rates [from the Fed] and depreciated dollar will provide only modest relief after a substantial lag.” Though he considers the Fed’s action “bold,” he fears a lag. Furman misses the point. Credit is a consequence of production. Always. We borrow money for what the money can be exchanged for. Assuming slower growth, meaning less production, there will be less credit available. The Fed can’t change that, thus raising a question of what Furman means by “modest relief” from the Fed. Try none.

As for a “depreciated dollar,” it’s seemingly lost on Furman and President Trump that investors denominate their returns in dollars. In short, a depreciated dollar will exist as a tax on the very investment that powers economic growth. Translated, a depreciated dollar will shrink investment when more would enhance growth.

Where it gets comical is when Furman argues that “Congress should pass a simple one-time payment of $1,000 to every adult who is a U.S. citizen or a taxpaying U.S. resident, and $500 to every child who meets the same criteria.” No, that’s just not serious. Let’s not forget that the vastly majority of federal revenues come from the richest taxpayers. What this means is that Furman is calling for a massive transfer of wealth of the hundreds of billions variety from the rich to the middle class and poor. He’s ignoring that unspent wealth in the hands of the rich is the most economically stimulative, company and job creating wealth of all, and it is because the rich will invest it as opposed to spending it.

Is it any wonder investors are a little bit worried? Right when investment is needed, policy types are looking to stimulate consumption. They can do no such thing as is. They can merely shift wealth from the hands of investors into the hands of consumers. The big loser in this scenario will be the economy as investment capital is shrunken by alarmist policy types.

There’s that old Randolph Bourne line that war is “the health of the state.” So true. In my case, and going back to the 2008 time period, I added that economic crises (real and imagined) are the state’s “oxygen.” They give the Furmans of the world a voice, and a perilous one at that. Economic growth is a consequence of investment, yet Furman and all too many economists are calling for the state to stimulate consumption. You can’t make this up.

Which brings us to Larry Kudlow, Trump’s NEC head. Kudlow knows what works, but the job he’s in forces him to play politics. So while he wisely dismissed the proverbial “helicopter drops” of money that so excite economists, he called for “targeted stimulus.” One supposes here that this was the bone Kudlow threw to his boss, and a Ruling Class that lives for “crisis.” That’s the case simply because Kudlow knows “targeted stimulus” is what’s already happening in the free marketplace all the time. Resources never sit idle; rather investors are relentlessly pushing them to their highest use. In short, “targeted stimulus” would in reality be the federal government doing nothing. Let market actors direct resources to where growth is optimized.

The problem is that the Ruling Classes don’t seek what’s best for growth. They seek what’s best for them. In an eerie replay of Rahm Emanuel’s line about how “you never let a crisis go to waste,” Furman worried in the Journal about “the likelihood that history judges the economic response to coronavirus as too little and too late.” Furman thinks like a policy guy. One senses Kudlow doesn’t, but has to.

The losers in this are the people in the real economy who yearn for more economic growth. Growth is yet again a consequence of market-driven investment, but policymakers are calling for a huge wealth shift from investors to consumers, alongside the politicization of investment. Sorry, that doesn’t work. Central planning that never works in boom times certainly doesn’t in trying times.

Maybe the above is the message of the market at the end of last week. With the virus priced, investor are now hedging themselves against a typically obtuse and alarmist reaction from policymakers that will enhance the power of government at the expense of the private sector where all growth takes place. More government waste, fewer GEs of tomorrow. Sad.

This piece ran in RealClearMarkets