We may currently be facing the biggest economic crisis of all time, because it is a multifaceted crisis: first, there is the pandemic with its disastrous direct consequences for tourism, the service sector, and trade. Secondly, there is an oil price shock with a geopolitical background. Third, there is a shock caused by supply chain disruption due to heavy reliance on just-in-time production and distant producers. Fourth, there is a crisis of confidence due to differing risk assessments and disagreements about whether Western governments are guilty of negligence or fearmongering to massively restrict civil liberties. Finally, the ultimately inevitable correction of an overstretched “everything bubble” in which the traditional instruments of monetary policy have been exhausted.
We are dealing with a stroke of fate, but not with a “Black Swan” event. None of the crises were unpredictable in themselves, least of all the pandemic. In 2012, a study commissioned by the German Bundestag had already analyzed and done detailed calculations about the scenario of a pandemic caused by a SARS-like virus, with alarming results. No less than Bill Gates himself has been issuing urgent warnings for many years. The current shock thus points to deeper-seated problems—namely, the decline in society’s ability to learn. This decline could sharpen even further throughout the crisis intervention, and that represents the greatest danger in the long term.
Of course, the economic shock caused by travel and curfews also has an impact on health—a fact that many overlook. Public Health and the economy are not mutually opposed. The main driver of longer life expectancies with a higher quality of life is increasing prosperity, contrary to the romanticization of earlier lifestyles said to be “in harmony with the environment.” The consequences of impoverishment due to the measures taken are invisible and are therefore easily overlooked. Economists may be inclined to make calculations—but in this case nothing can be calculated. One could compare the economic damage with the potential death toll, but this is a comparison that few would find morally justifiable. However, it is not so easy to dismiss: it is indeed a true dilemma.
On the one hand, the economic damage has an invisible but direct impact on life expectancy and will certainly claim some lives due to complex effects: e.g., suicides and murdered wives, an increased health burden due to lack of sunshine, lack of exercise, unbalanced diet, which is only partially mitigated in some places by a decreasing health burden due to improving air quality. On the other hand, this damage is more linear than the opposite side being compared: the scenarios of non-intervention in the current, incomplete state of knowledge.
The Exponential Increase in Intensive Care Patients Is the Problem
If one compares only the current deaths in the West, the damage of the interventions to life and limb is certainly higher. But all contrarians who make such comparisons ignore the traumatizing experience on the epidemic front: The problem is not the direct lethality of the virus, but the clearly exponential increase in intensive care patients. Due to the extreme speed of infection without consistent contact avoidance—primarily social, less state intervention—doctors on the front lines of the epidemic are suddenly confronted with having to decide who to let die helplessly. This death initially only affects risk groups, but the sudden rise of old relatives suffocating in full consciousness, without being able to say goodbye to parents or grandparents, is such an intense experience that the pressure is to intervene—at all costs! This may seem uneconomic, but it is ethically and epistemologically imperative. Precisely because we still know so little, containing exponential drama of this kind is the order of the day.
Nonetheless, the fact that it could come to this is due to a low level of social learning and institutional failure. The early warning period should have been enough to follow the success stories of Singapore and Taiwan, which today have much fewer constraints on public life and correspondingly fewer economic sacrifices that are directly attributable to the pandemic.
Limiting the Economic Damage: Political Misjudgments?
If there is currently no alternative to the interventions, which could change at any time with new findings, then the question of limiting the economic damage arises. Since interventions are ordered by policymakers, almost everyone is now thinking of economic and monetary policy measures to reduce the damage. But this is a misjudgment by both supporters and opponents of the current policy interventions. Western politicians rarely initiate something new, but rather jump on social trends with a delay. Here the pressure clearly comes from society. This is not only the case in Europe, as proven by the Wuhan-Whistleblowers, the conditions in Iran (an interesting case, since it is an authoritarian state), and the actions of the municipalities in Lebanon (in a dysfunctional central state). From a purely rationalistic point of view, the attitude of averting visible, suddenly escalating suffering and accepting invisible, long-term distributed suffering in return may seem “irrational.” However, to act on the basis of such pure rationality would itself be an unreasonable error of judgement, which the majority of the population will never subscribe to, even with the best arguments and the most zealous persuasion.
Politics can only allocate what arises from current or future productivity. Damage reparation through policy can therefore only work based on one of the following premises: First, politicians are better able to assess the situation and the future than private decision-makers. Second, debt instruments can already generate future tax revenues today, and earlier use saves higher costs or means greater prosperity later. The two alternatives therefore mean: current redistribution of poorer use of funds by private decision-makers to better use of funds by political decision-makers, or temporal redistribution of poorer use of private or political funds later to better use of funds today.
At present, it does not seem very likely that the first premise holds. Compared to Asian models, the extreme measures, taken seemingly out of shock, are a clear indication of an incorrect assessment of the situation by politicians. Certainly, society was not much more forward-thinking either, but redistribution can of course never go from the more short-sighted to the more far-sighted within society. Logic dictates that it can only go from those who still create value today to those who no longer create value today.
Dangerous Debt Policy in Times of Over-Indebtedness
Therefore, the only alternative—politics seems to be sure about this—is the second premise: Averting the emergency with new debt. But since de facto interest-free government bonds have become the increasingly important central bank asset, this means the creation of money. We have become accustomed to responding to every price correction with new money creation. The traditional instruments of monetary policy have long since been used for this purpose, and the central banks have either fallen or are falling into the zero-interest rate trap. The consequence of these interventions was further distortion of the economic structure and further postponement of learning processes.
Certainly, the current catastrophe is not easy to sit out. It is much easier to stop production processes than to get them running again. In principle, price slumps and corporate bankruptcies allow the production structure to pass into the hands of those who have better anticipated the future. Today, this means in the hands of those who are more liquid and robust, who can deal with new situations more flexibly and recognize potential before others. Airlines can vanish into thin air, aircraft—apart from some strange exceptions—cannot.
Currently, far too much of the production structure is controlled by actors who use it incorrectly, such as the so-called zombie companies: by incorrectly I mean in disagreement with the current and future needs and plans of people. But crises are always an indication of negative surprises—in other words, most people were wrong in their assessment, which can lead to shock. The less agile and adaptive a society is, the more severe its impotence in a crisis. In this situation, capital structures could be destroyed too quickly because the influx of new and better entrepreneurs and investors falters.
The greatest danger lies in the fact that a far underestimated (because it is invisible) part of capital disappears into thin air: knowledge. Developed production structures are far more mental than material. Stalled production could threaten the necessary transfer, increase, and preservation of knowledge. Economically relevant knowledge needs practical application to stay fresh, or it can quickly become obsolete.
Income Comes from Productivity, Not from Redistribution
Unfortunately, most people overlook this mental aspect. It does not mean that jobs have to be preserved at all costs. Due to the distorted economic structure, many jobs are far from being knowledge work, as would be necessary for a dynamic and innovative economy. A growing proportion of jobs persist because of the inertia of distorted production structures, which often no longer represent net production but net consumption—i.e., the real value added is lower than the costs, especially when opportunity costs are considered. Another part of the jobs serves process control and continues to exist in de facto technically stagnant economies due to the inertia of technical development: thus, it requires people only because no one has yet had the reason and competence to optimize processes.
Many are used to seeing jobs as assigned sources of income, as permission to receive a salary. In fact, all income must come from productivity, from the use of activity in conjunction with capital to better satisfy the needs of others. Redistribution, especially the hidden—but more important—monetary redistribution, hides this need, but does not eliminate it in the long run.
What if productivity suddenly drops to zero in your own area because a catastrophe interrupts production? Such challenges are an unavoidable fact of life. Death is certain, and it is usually preceded by a prolonged period of declining productivity. This is the reason for retirement provision, supplemented by accident and illness prevention. The traditional way of this provision is saving: the conversion of income into assets. This path has been made so difficult and is so severely punished by monetary and fiscal policy that only a few people still travel it. This leads to increased redistribution dependency, which must eventually lead to a disastrous lack of provision due to demographics.
We are currently getting a taste of this. The fact that more and more people are living from monthly salary to monthly salary while also having negative assets (debts) is evidence of the dwindling sustainability of the economic activity to date. If incomes then suddenly collapse due to unemployment, displacement by competition, poor entrepreneurial decisions, illness, age-related problems, or even an unexpected catastrophe, existence is immediately threatened. The basic question that now arises in view of the pandemic is therefore: can such a provision gap be filled by monetary policy?
Fiscal Policy and Monetary Policy Are Already Exhausted
This is impossible in the long term. After all, the provision gap has grown because of monetary policy. Fiscal policy has been replaced by monetary policy. This then leads back to the first premise: the demand for a return to fiscal policy. Monetary policy should then no longer redistribute wealth to the wealthy but should serve as an instrument and facade for redistribution from the haves to the have-nots. Unfortunately, monetary policy replaced fiscal policy precisely because the former had already been exhausted. Western countries are all at the upper end of the Laffer curve: fiscal redistribution leads to the disappearance of the cake to be distributed. Germany and France are at the forefront of a reverse brain-drain: entrepreneurial and wealthy people emigrate in droves or give up entrepreneurship and asset accumulation.
It is naive to assume that extraordinary monetary policy measures such as helicopter money will allow a more sustainable redistribution. The more extraordinary the measure, the fewer people will correctly anticipate the consequences, and thus the fewer will benefit from it. In an economy distorted by monetary policy, the greatest gains in wealth are always to those who, consciously or subconsciously, best anticipate the consequences of central bank policy. A basic income for everyone created by monetary policy sounds charming, but it suffers from the fact that basic purchasing power for everyone cannot be created by monetary policy, but only by productivity. The path of helicopter money leads directly to stagflation with price controls, then capital controls, followed by economic collapse. At best, this does not apply to the U.S., because after the global currency, the dollar, there is increased demand in the event of a crisis: dollar allocations to citizens are thus de facto transfers of purchasing power from foreigners (late dollar recipients) to nationals (early dollar recipients). This works well until the dollar is no longer a world currency—and world currencies are never eternal.
Nearly all monetary, fiscal, and economic policy measures—if they are geared toward fixing damage, rewarding an inability to learn, thwarting structural adjustment and further undermining sustainable foundations of productivity—lead to a spiral of intervention. The only sensible policy measures will temporarily cushion the greatest need and prevent disasters in capital consumption. All other measures by nature spring from society in a voluntary manner—but can of course be stimulated, accompanied, and supported by politicians who are part of society. These measures treat the catastrophe as an opportunity. After all, it is not a black swan event. It points to catastrophic shortcomings which most people have overlooked.
We Are Faced with a Learning Opportunity
Now we have the opportunity to achieve the reality of a globally networked world with new challenges, including epidemics. The new virus is often relativized in comparison to influenza. In fact, the comparison shows the trauma of influenza, which we accept in a defeatist manner instead of reacting through innovation. The infection rate in kindergartens is completely unacceptable during the flu season (in addition to more and more other diseases). The fact that this has not yet led to decisive technical, educational and institutional measures shows the stagnation of our supposedly modern societies. The iatrogenic diseases in hospitals are also completely intolerable. For many elderly people, their stay in the hospital after a harmless fall becomes a death sentence. Outpatient clinics of the European health care system were often overcrowded before the epidemic, to the extent that patients generally wait many, many hours in cramped conditions with other contagious patients—because there are no incentives to optimize processes.
Especially in Austria, it seems that nothing can be learned from history. Ignaz Semmelweis was once ridiculed by the experts of his time! The current epidemic is exposing the still dramatic carelessness in hospitals (which in no way calls into question the heroic work of many doctors—especially now). But perhaps it is time to question the concept of “hospital” altogether. This is where the most bitter lessons of our time are to be learned: lack of protective equipment, lack of structural flexibility, weak leadership, poor processes, and lack of innovation. Good workshops today have 3D printers because sometimes suitable components are not available. What hospital has a 3D printer, even though a missing component costs lives?
Suddenly it becomes possible to work from home, digitalization is required, and the value of redundancy with simultaneous process optimization is recognized. The best compensation for damage would be that in which the currently bitter learning process leads to an evaluation and improvement of processes, structures, technical solutions, companies, and institutions. To compensate now, for example, for stationary retail trade or mass tourism upscaled with loans through subsidies will only create greater problems in the future.
The best and most urgently needed policy measure at present would be: Immediate tax exemption of all labor income related to the care of intensive care patients and of all business turnover related to the production of technical aids for pandemic management. This would be systematically extended to further dramatic shortages and, instead of a braking effect, would activate incentives, such as additional doctors accepting personal risk and burden, and production capacity not standing still, but being restructured as quickly as possible.
A certain amount of solidarity is, of course, necessary and helpful in order to make the necessary reorganization of the production structure a success. But solidarity must not be an excuse to resist this change. For most people, the current disaster shock is a phase of reflection, of reorientation. Let us use this opportunity to regain our capacity to learn as a society, so that the next disaster will hardly be a stroke of fate! In the past, when societies were doomed to catastrophe, their downfall was always long in advance: due to previous paralysis, dwindling ability to learn, and a lack of innovative strength.
Most Western Europeans and Americans believed themselves to be in the best of all worlds, and even believed that they would have to discipline or possibly save the rest of the world with their immense wisdom (provided that others would bear the cost of their infinite generosity). It is to be hoped that the current shock will lead to self-knowledge, to a new humility, and to the realization that we are not at the end of history, but in a dynamic world in which we must constantly learn.
Translated from German by Thomas and Kira Howes. Originally published at the Austrian Institute.