Covid-19 has killed supply-side economics. I'm sorry, Friedmanites, but it's true.
The idea that as long as we lower taxes, cut regulations, and lower interest rates, any economy can recover from any recession is something that should have gone the way of the iPod, but for some reason it has lingered in the ivory towers of the University of Chicago, conservative think tanks, and those altogether detached from reality. Until now.
The reason I say this is because over the last six months liberals and conservatives the world over have joined together to craft trillion-dollar stimulus packages that are designed to simply give people money. While some view this policy as insanity – “How can the government just hand out money?!” – it has been enormously effective in arresting the economic fallout of Covid-19, so effective that central banks are asking politicians to do it again.
Now it did take some time for us to get here. Our conservative friends needed a crisis like Covid to understand cutting personal income taxes doesn’t work if you don’t have a job, that eliminating regulations doesn’t work if firms are going bankrupt, and that cutting interest rates isn’t possible when they are already at the zero lower-bound. But nonetheless, they eventually saw the light. What we’re in is a demand shock—the biggest the world has seen since the Great Depression—and the free market won't save us. In fact, letting the market run unimpeded will only impose greater pain on millions of people and drag our economy to even greater depths. We need government intervention—lots of government intervention—and if Milton Friedman were alive today he would say the same thing.
The Great Recession should have been enough evidence to the harms of supply-side logic, but whether it was Republicans in the US coming to terms with just how ineffective a payroll tax cut would be in fighting Covid, Tories in the UK begrudgingly authorizing fiscal stimulus to the tune of 8 percent of UK output, or economists in institutions like the World Bank and IMF admitting the Washington Consensus of austerity may not work in our current predicament, policymakers everywhere have said in one way or another supply-side solutions don’t work in deep downturns, and they're right.
So now that supply-side economics is dead, we can finally start crafting real solutions. Getting out of this mess will require trillions more in stimulus, a functional vaccine, and a global mask mandate. Until we can safely go to work, shop, dine out, and send our kids to school, we will need government to guide us through this bumpy transition. Government will need to alert us to vaccine developments, to mandate vaccinations once one is developed, and micromanage municipalities by having them provide timely updates on reported Coronavirus cases. Last, and perhaps most important, we will need financial assistance when and where it’s called for.
Fortunately, though, it’s rather cheap for governments to borrow right now so doing all of these things is rather affordable. What will be expensive, however, is being too focused on deficits and debt and not enough on the public's general welfare. Frugality will only slow the development of a vaccine, create drags on output and employment, and increase anxieties. The data back this up because nearly every economic model—from the IMF to the UN to Wall Street—shows the less we spend now, the more we will spend on unemployment assistance, food assistance, housing vouchers, and healthcare in the years to come and the less likely our economies can revert to steady growth paths and provide enough tax revenues to maintain debt sustainability.
Getting through this will be hard. There is no questioning that. But there is plenty we can do to make our situation just a little more tolerable, and it’s the job of government, not the free market, to do those things.
The supply-side is dead. Long live the demand side.