How Irrationality Might Lead to another Great Depression

As all of you can plainly see this virus is radically reshaping our economy right now.  I wanted to share with you an article I wrote (published in today's Orlando Sentinel) that will help you have better insight into what at least one economist is thinking.     If you are willing, sharing your insights into what you have experienced so far might be useful and therapeutic.

Here is the article..

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How Irrationality might lead to another Depression

As the United States, and the world, reacts to the spread of the Covid-19 virus I find myself wondering how many Americans are still alive who witnessed the economic calamity that began in October 1929.   They would come in handy right now as economic advisers to a nation that is about to panic its way into a possible second Great Depression.

It is staggering to fathom how economically myopic and reactionary our “leaders” are being at this critical time in our nation’s economic history.

Everywhere we look we are being told to go home, stay home, don’t go out; don’t interact with one another and more.  It is as if the politicians have been bestowed with some special powers to engage in policy making decisions that will somehow magically defy the laws of supply and demand.

Let’s look at it.

In an economy of more than 330 million consumers who purchase more than $20 trillion in goods and services annually, how do we continue to fuel the demand side of the economy if we are told we should not buy tickets to sporting events, hotel rooms, theme parks, restaurants and more?  If we only go out to buy toilet paper and medical masks, where do the millions of workers who depend on our purchases earn enough money to avoid being sent to the unemployment lines?

Our labor force and suppliers are also being bombarded by the doomsday scenarios outlined by those we put into office to make good decisions.

Sending labor suppliers home disrupts the entire supply chain of goods and services that prevent massive shortages, business closings and collapsing infrastructure.   The more people who are withdrawn from the labor force the greater the threat of stagflation – a combination of high unemployment and inflation – that last reared its head in the 1970’s and early 80’s.

Of course we are all being told that these decisions, while painful for a while, will be far better than leaving us alone to make our own choices of buying, selling and working.  The experts are saying that unless our lives are interrupted for an indeterminate period of time we will suffer even greater losses in the long run.

Exactly how do we know this?  What if this virus goes on into the fall?   How many months can our economy survive shattered by the possibility of accelerated cases around the globe?   What if in the meantime we see unemployment surge to levels higher than at any time since the 1930s?  What if the gross domestic product dives by double-digits?

Do we really believe that Americans are ready for an economic downturn that no one under 100 years old has ever endured?   Can we really expect deprivation on a scale that eliminates virtually all luxury spending and sends millions into poverty?

It is important to note that there is virtually nothing in the way of monetary and fiscal policy that our government could use to fight another Depression.

Interest rates are already historically low and, as we saw in the 1930’s, if people are scared to borrow, nothing the Federal Reserve Bank does can compel us to incur more debt.

Taxes are also low by historical standards.   Donald Trump’s recent cut in personal and corporate income taxes generated very small gains in revenue – an indication that more tax cuts would not create greater economic growth.

The federal deficit – fueled by profligate spending by both parties – is also near record levels so even more spending is not likely to create more jobs.

I am afraid that economic historians will someday look back at 2020 as the year our hyper-reactive society allowed elected officials to shut down the largest economy in the world and ended up destroying more lives from the ensuing economic meltdown than the virus would have.