Economic Policymaking in a Vacuum

Robert McGarvey
September 11, 2020

It is becoming increasingly apparent that economic policy makers have no idea how deep the post-pandemic recession is going to be, or how to implement a practical recovery programme.

Just how desperate could the situation become?

Gita Gopinath, the IMF’s economic counsellor, said: “The magnitude and speed of collapse in activity that has followed is unlike anything experienced in our lifetimes,”.  Predicting the worst recession since the Great Depression, and far worse than the Global Financial Crisis with the cumulative loss to global GDP over 2020 and 2021 around $9 trillion.

This gloomy assessment is not universally shared, but what we do know is that unemployment is at record levels and is unlikely to recover rapidly. And although the stock markets continue to perform well, administrations in the United Kingdom are reaching record highs, with several reknown retailers like Debenhams, Go Outdoors, Harveys Furniture and Victoria’s Secret, leading the way. 

It is a times like this that officials seek advice from the professionals, economists, senior academics and the Big Four accountancy firms, only to discover that, not only did these experts miss the 2008 Financial Crisis, but they have little to offer policy makers other than endless government subsidies.

Regardless of your political philosophy or economic inclinations - the silence - the vacuum of understanding around the scope and nature of this problem is surely a screaming admission of our ignorance.

The truth is it is impossible to recover an economy the existence of which you refuse to acknowledge in the first place. 

According to orthodox economic theory there is no such thing as a ‘new’ economy. Although intangibles (inputs, stock and outputs) dominate the global business environment today, and companies like Amazon, Google and Facebook are ruling global stock markets, intangible forms of capital and their derivative assets continue to be written off by economic professionals as ‘old wine in new bottles’.

This inability (or unwillingness) to adapt to a new commercial reality, presents two problems, it neuters policymakers and limits financial leverage, both of which are desperately needed. 

Digital assets like software, social media networks and apps as well as big data are different-in-kind from traditional assets. They have unlimited reproducibility and are instantly distributed around the world at little or no cost. As a result, the laws of scarcity do not apply, which undermines the foundational law of supply and demand. 

These factors weaken economists’ models to the point where traditional policy options seem to be making the problem worse, not better. 

But ignoring or not adapting to intangible assets has another more practical disadvantage - it reduces corporate equity and therefore financial leverage at a time when it is needed most. 

The one thing - perhaps the only thing - that academics and policy makers around the world can agree upon is that increased liquidity needs to play a lead role in the recovery. 

McKinsey’s recent report, Reimagining the Postpandemic Future (August 2020), cites seven initiatives governments need to employ in rebooting their economies. 

Apart from the old chestnut of accelerating productivity enhancement, fully five of the recommendations involve vastly increased government spending. These include increased public investment in innovation ecosystems, inclusive growth, digital infrastructure, skill and talent generation and making cities citizen-centric. 

The ability of government to utilise central bank resources to increase lending to corporations depends upon the financial health of those companies. However, with virtually no intangible assets resident on balance sheets, all the financial metrics including profitability, equity and associated financial ratios are understated. 

This negatively impacts corporate refinancing plans but also limits policy options for governments hoping to use central bank monetary resources to re-launch the economy.

But more generally, assets are of critical importance in a capitalist economy. All assets, including intangible assets, are storehouses of value. This value ultimately unpins the quantity and quality of a nation’s money supply - the more assets, the greater the monetary options that are available to reboot a stumbling world. 

Perhaps it is time economic thought caught up with the economy and identified both the nature of our intangible future and the means to achieve that future.

Robert McGarvey

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