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

‘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

LBooneDecemberEditorial

12 thoughts on “‘Let’s Hope’: The OECD’s Latest Outlook And The Absurdity Of The Austrian ‘Reset’

  1. “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’ ”

    That’s a good point.

  2. This is a fantastic post. I wholeheartedly agree with investing in children and education and science. I am actually heart broken over the collapse and resulting closing of the Arecibo radio telescope in Puerto Rico- due to lack of government funding in science.
    Also, due to a never ending supply of “cheaper” labor from outside the US and the continuing trend to replace human laborers with robots/computers, our best chance for increasing living standards for the poorest in the US, is to educate to increase the pool of skilled labor.

    I remember reading your post “Where Were You When the World Did Not End” when originally posted— not only for your usual fantastic insights but also because I appreciated and valued the trust that you placed in us, your collective group of students, which led you to disclose a glimpse into who you are as a human, not just as our professor.

  3. The Achilles heel of the Austrian school is that their theories were formulated in a different era. Specifically when it comes to how long it takes to come to settle creditor claims in the modern court system. As I recall, it took over three and a half years to fully settle legal claims from the Lehman bankruptcy. Imagine if it had not only been Lehman, but Citibank, JP Morgan, Goldman Sachs, GE etc etc.

    No healthy re-allocation of capital during that period would have been possible. The Austrian purges sound nice on paper but are impractical in any country where the rule of law prevails.

    On another note, I’ve been too lazy to research it, but one tenet of at least one member of the Austrian school was the need for open borders when it came to the movement of capital, goods and LABOR. I love to ask GOP blowhards who claim to be adherents of Austrian theories where they stand on that aspect of their world view. A lot of hemming and hawing ensues.

    1. Yeah, most of the people who advocate for this kind of thing online haven’t actually studied the relevant literature in an academic setting or really even on their own. They don’t understand the context or the historical debate. They just read about it on some blog somewhere, and then they parrot it because it sounds “right.”

  4. Economic ivory tower thinking is a lot different than policy in the real world that affect real people. Austrian economics in my view has some useful elements like many social and economic theories but as an operating principle it is largely bunk. It is cruel and does not factor in the suffering it will cause as a cost – it only focuses on the benefits down the road. As Keynes once said, “In the long run we are all dead”. Until the US as a society focuses more on the needs and yes the benefits of helping the less well off, we will be operating at a level that is far from optimal. Creative destruction sounds great until you are in the middle of it.

    1. Nonsense! I once heard Joe Kiernan talking about how great creative destruction is. (Perhaps in 2010 or 11?) He suggested that laid-off coal miners pivot to writing iPhone apps. Now there’s a solution!

        1. If you’re talking about Joe Kernen (i.e., the CNBC anchor) he appears, at times, to wear a Presidential Rolex. Nothing wrong with that (at all), but anyone wearing a Prezzy and talking about creative destruction is almost by definition a charlatan. Those two things just don’t go together very well. 🙂

  5. Thanks for sharing this piece I would never have seen otherwise. As to creative destruction remember inertia — it’s the law! We are where we are and will keep going how we are going without enormous force applied to the contrary. No real support for that amount of force, or the past for that matter.

    I was going to insult Joe Kernan but instead I checked up him a bit. I found that he actually holds a masters in Molecular Biology from MIT. What a waste to take all that training and become a vacuum cleaner salesman at a brokerage house for ten years. I also read that he makes 22 mil a year but only has a net worth of half that amount. Not much of an investor I’d say.

  6. I suspect all the talk of re-engineering the societal and economic structure we have become accustomed to in our lives is in part because subconsciously we know we are approaching an end of life as we know it. With climate change and the decreasing ability of the oceans and the arable land to support a growing number of mouths to feed, what is the answer?? Other than the obvious one of vastly decreasing the horde.

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