‘Let’s Hope’: The OECD’s Latest Outlook And The Absurdity Of The Austrian ‘Reset’

Six months after declaring COVID-19 “a global health crisis without precedent in living memory” and bemoaning the “enormous damage to people’s health, jobs, and well-being” inflicted by “the most severe economic recession in nearly a century,” the OECD is out with their latest global economic outlook.

The December tome, which clocks in at a “succinct” 267 pages, finds the OECD cutting its global growth forecast for next year to 4.2% from 5%.

“Activity will continue to be restricted with social distancing and partly-closed borders most likely remaining through the first half of 2021,” the outlook says. “The global economy is expected to gain momentum only gradually, as vaccines are deployed throughout OECD countries.”

Notably, China is expected to account for more than a third of global economic growth next year. OECD economies are expected to expand 3.3%, marking just a “partial” recovery from 2020’s “deep recession.”

As Chief Economist Laurence Boone wrote Tuesday, “a striking feature of these projections is the shrinking contribution of Europe and North America to global growth.” The virus, it would seem, has accelerated China along the path to economic hegemony. Some readers will cringe, but it just is what it is.

The global economy as a whole should regain pre-pandemic levels of output by the end of next year, apparently.

Boone also reminded policymakers around the world (and especially in developed economies) that things would have been very bad indeed without aggressive fiscal and monetary support.

“Thanks to unprecedented government and central bank action, global activity has rapidly recovered in many sectors, though some service activities remain impaired by physical distancing,” she wrote, adding that “without massive policy support, the economic and social situation would have been calamitous.”

Yes, “calamitous.” And, as I’ve tried (with varying degrees of success) to communicate to readers over the course of the pandemic, the vast majority of citizens in developed economies are not, in fact, prepared for that kind of scenario. I argued the same point in 2008, although unfortunately, I can’t provide any links to those discussions other than the tantalizingly vague vignette from “Where Were You When The World Didn’t End?”

Let me just expand for a moment. The creative destruction “cure” is absurd for advanced nations. Anybody who suggests otherwise is a charlatan. When it comes to the feasibility of allowing for a “grand” purge of misallocated capital due to a pandemic, a financial meltdown, or anything else for that matter, I often quote Robert Skidelsky. “On the Austrian analysis, recessions give a chance to re-allocate ‘mal-invested’ productive factors to efficient uses [and] they should therefore be allowed to run unhindered until they have done their work,” he wrote, in Money and Government. 

Skidelsky then reminded his audience that “economists whose common sense had not been completely destroyed by their theories rejected the drastic cure of destroying the existing economy in order to rebuild it in the correct proportions.”

Whenever there’s a recession, there’s a crowd that pretends to be in favor of a temporary return to a Hobbesian state of nature. Those calls were around long before the internet, but now, everyone with a social media account or a website has the capacity to claim that what’s “needed” in advanced economies is a “purge” of misallocated capital.

Those folks always suggest they’re fully prepared for the knock-on effects of that. But make no mistake: They aren’t. The cold, hard reality is that the people who would fare “well” in that most extreme of scenarios are the people who are already living some version of it. If the ATMs went dark, the shelves went bare, and entire developed nations suddenly looked like towns preparing for an incoming hurricane, the only people who would know what to do are the people for whom every day is already a matter of life or death, either in an economic sense or, in the case of some of America’s most underserved urban communities, in a literal sense. Just because you own a rifle, have a lot of canned goods in the basement, and have a framed copy of the Second Amendment hanging in your living room, doesn’t mean you’re ready for the Austrian “reset.”

So, what does that mean? Well, it means that more policy support going forward is crucial. There can be no “purging” of misallocated capital — not in a true, “across-the-board” sense, anyway, and certainly not in advanced economies where the irony of tweeting about the relative merits of such a scenario from a suburban mini-mansion or a $1,000 iPhone seems to totally elude folks. Here’s how the OECD’s Boone put it on Tuesday:

Despite the huge policy band-aid, and even in an upside scenario, the pandemic will have damaged the socio-economic fabric of countries worldwide. Output is projected to remain between 4 to 5% below pre crisis expectations in many countries in 2022, raising the spectre of substantial permanent costs from the pandemic. The most vulnerable will continue to suffer disproportionately. Smaller firms and entrepreneurs are more likely to go out of business. Many low wage earners have lost their jobs and are only covered by unemployment insurance, at best, with poor prospects of finding new jobs soon. People living in poverty and usually less well covered by social safety nets have seen their situation deteriorate even further. Children and youth from less well-off backgrounds, and less qualified adult workers, in particular, have struggled to learn and work from home, with potentially long lasting damage.

Governments will have to continue using their policy instruments actively, with better targeting to help those hardest hit by the pandemic. The fact that vaccines are in sight suggests that this is not the time to reduce support, as was done too early in the aftermath of the Global Financial Crisis. Rather it confirms health and economic policies must work hand in hand. Public health measures have to double down to limit the impact of cyclical virus outbreaks and the associated restrictions. It is also crucial that policymakers ensure continuous fiscal support to keep sectors, firms and the associated jobs alive. The lessons from the last nine months are that such policy action was and remains appropriate. Monetary and fiscal policy will need to continue working vigorously in the same direction, at least as long as the health crisis threatens otherwise viable economic activities and employment.

That is the reality of the situation. If monetary and fiscal policy don’t continue to move in the same direction in advanced economies, inequality will worsen materially as central banks shoulder a disproportionate share of the burden for sustaining the recovery but without the proper tools.

As usual, Boone’s exposition is eloquent and characteristically upbeat, despite being replete with stark warnings. What she doesn’t say, but I will, is that if, heaven forbid, policymakers were to accidentally go too far down the road towards allowing “free market” forces to work their “magic” or otherwise “letting the chips fall where they may,” the irony would be that the scores of previously “vulnerable” people who suffered as the existing system failed them, would quickly metamorphose from “prey” to “predators” in the kind of world the Austrian crowd pretends they want to live in. Don’t forget that when you argue against government intervention and expanded social safety nets.

On a more positive note, the OECD’s Boone writes the following: “When asked what the post-COVID world will look like, let’s hope the answer will be: ‘Perhaps mostly the same, but a little bit better.'”

Yes, “let’s hope.”

Full editorial from Boone