– May 27, 2020

Modeling the economic effects of the COVID-19 crisis and the attendant Great Suppression, the almost nationwide economic lockdown that is finally easing in some places, is no easy matter. Getting the model right is crucial to implementing the correct macroeconomic stabilization policies. Simply because past recessions have been combated by stimulating aggregate demand (via lower interest rates and/or other forms of “stimulus”) does not mean that the current recession can be cured with the same remedy. 

Like the economic lockdowns that have rendered some form of stabilization necessary (unlike during the Spanish flu), government stimulus packages may not help the current situation but they certainly will create incalculable large, long-term costs.

In a previous post, I suggested that modelers look to the occupied parts of France during the Great War (or the portions of the U.S. South, like New Orleans, occupied for long periods during the Civil War) for analogs, which basically reduce to simultaneous negative aggregate demand and supply shocks. During occupations or lockdowns, people do not produce or consume as much as they otherwise would have, so total output (e.g., GDP) decreases. Potentially big swings in the price level, from deflation to runaway inflation, likely in that order, are also likely.

Moreover, the specific goods producers supply may not match well with those demanded during military occupations or lockdowns. Most macroeconomists today pay such mismatches little heed as they rightfully believe that producers that make stuff that people do not want will exit and be replaced by producers that make goods in demand. Usually, that process is largely imperceptible, observed as changing product lines or, in the extreme, the failure or merger of Such-and-Such Company and the IPO of This-and-That Company.

Some late nineteenth century business cycle theorists, however, took supply and demand mismatches more seriously. Consider John Laing’s The Theory of Business for Busy Men (1868), which can be found in volume 5 of the Pickering and Chatto (now Routledge) series on the History of Corporate Finance that I co-edited with Richard Sylla, the chairman of the Museum of American Finance. Although not canonical, Laing’s book is as good as any to start investigating the forgotten mismatch concept, first made famous by French political economist Jean-Baptiste Say (1767-1832) and his contemporary, James Mill (1773-1836), especially Mill’s Commerce Defended (1808), in which Mill showed that all major macroeconomic distortions stemmed from war or “the injudicious tampering of government.”

Laing begins by making clear that Great Britain’s wealth rested not so much in “a hoard of savings” as it did in some fixed physical capital made productive by the “skill of workpeople, and the professional attainments of doctors and barristers,” or what we today call human capital. “A community is rich rather potentially,” he explained, “than in the sense of really having” because most of what people own “will have disappeared” within a year or so if not replenished (pp. 28-29 of the reprint edition).

“The fear of universal glut,” he further explained, “is now admitted to be groundless” (p. 30). (Laing was too sanguine on that point as the notion that an economy could produce too much re-emerged with a vengeance, zombie-like, in J. M. Keynes’ response to the Great Depression.) Although he reiterated that “an overproduction of all wealth can never occur,” Laing explained that a “change of taste” could cause goods to go unsold, at least at previous prices. “Here the alteration of desire, to coin a word, unwealths certain articles” (p. 30). Beaver trappers and whalers, for example, found their products suddenly fall out of favor with consumers and hence plummet in price.

Some American producers definitely experienced this unwealthing mismatch during the Great Suppression when farmers destroyed food because processors could not package and distribute it as planned, e.g., milk was poured down the sewer because children were not in school to drink it out of those tiny cartons that have been a staple of school lunches since I was a child in the 1970s. (I am an X not a boomer!) Other examples, like home versus public bathroom toilet paper, abound.

How big an issue supply and demand mismatch will remain depends on the extent to which COVID-19 will permanently change our world and the speed with which producers conform to new consumer desires. The truth about the amount of permanent change rests somewhere between the hyperbolic claims that the novel coronavirus will change “everything” and the only slightly less implausible notion that soon everything will be back to “normal,” whatever that means.

Let’s suppose that henceforth consumers no longer want to engage in group fitness, to eat, dance, or drink in crowded clubs, or to attend live musical, sporting, or theatrical events. Such considerable mismatches may be worked out, but it will take some time to do so. One can imagine, for example, stadiums entirely retrofitted with enclosed skybox-ype seating for couples up to large extended families and equipped with automated food delivery and cleansing systems. But of course if ticket prices cannot rise enough to pay for such facilities they might go unbuilt. Many people cannot afford a Peloton exercise bike either and the whole point of clubbing is to be in a crowded space with other hot, sweaty people.

Mismatches between pre-COVID supply and post-COVID demand might also go unresolved if producers fear that their investments are unsafe. Two types of risk loom especially large, COVID reinvestment risk and political risk.

The former refers to the risk that businesses have to take to reduce the mismatch between old supply and new demand given the possibility that pre-COVID conditions could return in their particular economic niche. Consider, for example, certain types of eye-testing equipment. I recently learned from personal experience that the torture machines (Those who need corrective lenses know what I mean: “1 or 2? 1 or 2? 3 or 4? 3 or 4?”) found in every ophthalmologist’s office fog up when the patient is wearing a mask, thereby increasing the length of the prescription phase of appointments by about 5 percent. Will eye doctors buy new machines designed to mitigate the fog problem? Will manufacturers of those machines design and produce them? Who could possibly make such a decision at this point? In a month? In six months? (If you are thinking that refitting ophthalmology offices is “good for the economy,” you need to read Bastiat’s broken window fallacy.)

Consider also men’s bathrooms, like the one pictured below. Many will say that these urinals were always too close but they definitely are in terms of the six-feet social distancing guideline. Should one be removed? That will cost the store owner for a plumber and also may cost her lost business as men opt for one of her three nearby competitors in the interstate exit gasoline and bathroom trade. (If you are thinking that removing the urinal is “good for the economy,” you need to read Bastiat’s broken window fallacy.)

The shuttering of this fast food restaurant condiment bar also represents a mismatch. The franchisee paid good money for a capital asset that has been lying fallow and may never be employed again, its function taken over by a much more expensive and less efficient bag of carbon named, in the case of my recent visit, Tyler. (If you are thinking that removing the condiment bar is “good for the economy,” you need to read Bastiat’s broken window fallacy.)

And check out this newly-added door opening device. Just slide your foot under the black thingy on the lower left and pull the door open with your foot. It’s a super nifty way for those with a modicum of physical dexterity (even me!) to open the door without touching the handle. But it is a pretty useless appendage unless there is a pandemic caused by a contagion transmitted mostly by touch (and it increasingly looks like the novel coronavirus is not of that class.) (If you are thinking that adding these foot dohickeys to doors is “good for the economy,” you need to read Bastiat’s broken window fallacy.)

The new cost or inefficiency in eye exams, fewer urinals, expensive human condiment bars, and door foot openers is relatively minor but can quickly add up over the entire economy and of course constitute only a few examples. Many other mismatched costs are potentially huge. If K-12 schools and universities permanently go online, what will become of their buildings, stadiums, dorms, and such? Maybe they can be sold or leased at a decent price, but maybe they can’t. 

And what happens if students demand a return to in-person learning in a year or two, or ten? Ditto with business and NGO offices. Maybe we will need more and better servers and internet access or maybe office space will need to be redesigned. It will take time and money to reconfigure our built environment and the costs may or may not turn out to be necessary, or helpful during the next crisis.

The other big risk facing businesses thinking about reducing the mismatch between pre- and post-COVID supply and demand is also difficult to measure at present, and will likely remain so at least through the November elections. As Laing (quoting Scottish-Canadian-American political economist John Rae) noted, the incentive to make business investment “is weakened [by] the instability of the affairs of the society, and the imperfect diffusion of law and order throughout it” (p. 152).

Laing also explained that the cost of capital “is very high” in “all countries where life and property are insecure” because “the few who consent to act as capitalists need a large proportion of the result to induce them to do so. The capital-employing capabilities of a community are in this view grounded in its intellectual and moral condition” (p. 152). While interest rates are low right now, it is not clear that businesses can, or want to, borrow any of it for other than survival/liquidity purposes. And angel and venture capital and IPOs are likely to remain in short supply until some certainty returns.

What is the intellectual and moral condition of America, post-lockdown? All I know is that I am happy not to have to work on calculating economic freedom scores for 2021 because they are way down across the board, though less so in Sweden and the five free states of Arkansas, Iowa, Nebraska, North Dakota, and South Dakota. California and Michigan may end up with lower 2021 economic freedom scores than Burma/Myanmar’s 2020 score of 54 (out of 100 by the Heritage Foundation’s scoring).

To improve the country’s intellectual and moral condition, the musty COVID-19 crisis air needs to be cleared. La FOIA Grande should occur, and sooner rather than later if there is any hope of the 2020 elections being widely viewed as legitimate. Some non-elected government officials need to resign and some gubernatorial incumbents need to have the fortitude, as President Johnson did in 1968, not to seek re-election. SCOTUS needs to step up and put its stamp of approval on the recent brilliant decision of the Wisconsin Supreme Court.

With the air cleared and those who initiated the Great Suppression that created a Say’s Mismatch duly chastened, or chased out of office, America’s innovators might have enough confidence to match new consumer demands with new investments in new products designed for a post-COVID world. One thing is certain: mismatch mitigation will not happen under duress or through mere stimulus.

Robert E. Wright


Robert E. Wright is the (co)author or (co)editor of over two dozen major books, book series, and edited collections, including AIER’s Financial Exclusion (2019). Robert has taught business, economics, and policy courses at Augustana University, NYU’s Stern School of Business, Temple University, the University of Virginia, and elsewhere since taking his Ph.D. in History from SUNY Buffalo in 1997.

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