Macro is Sleeping

Covid is frustrating for policy makers now and their inability to understand one thing is leading to ineffective policy at best and some very dire consequences at worst.

Let’s suppose you have a headache and you take a couple of Bufferins. That’s what you usually do. But this time the headache doesn’t disappear and you take two more.  Still, the headache persists. At some point you have to realize that something has changed. A different remedy is needed. Maybe you need to shut your window to keep the dust out?

Today the Fed has poured massive amounts of money on the US economy and set interest rates near zero. Congress has enacted stimulus in the trillions of dollars. Yet with all this activity, we still worry about a short-term recession and possibly slower economic growth for a decade.  

Monetary and fiscal policies are traditional tools. John Maynard Keynes was among others aptly named “Keynesians”, who invented a story that we call macroeconomics. Monetary and fiscal policies are macroeconomic tools designed to mend a macroeconomic problem.

Macro problems are real. And they require macro remedies. But just as a headache might not be fixed by a pain pill, economic problems might not be fixed by a macro policy.

A recession is usually thought of as a macroeconomic problem. Recently I wrote about the slack sisters – how unemployment and a real GDP gap are evidence of an economic problem. Today I want to emphasize that these sisters of slack are not always caused by macro sources or events and therefore the typical macro tools might not be useful.

What is a macro source? Macro is a convenient and useful “lie” or theory that lets us think of the economy as if it were one factory pumping out schmoos. If people decide to save more and quit buying schmoos, then the macro doctor rushes in with more money or lower taxes to induce us to spend more. Macro problem solved!

But what if this macro lie does not fit the problem? What if in fact, the economy cannot be portrayed as a single or integrated entity but instead is more like two or three different ones.

What if the current problem does not find all sectors of the economy moving as if hinged together? What if instead, one sector is vibrant while the other one(s) is (are) in real trouble? In that case, it might be less useful to take one macro pill. Instead of putting on our macro hat, we should be wondering why that one sector is dormant.

Today the story finds companies most negatively affected by Covid shutdowns in one sad tent – with a bunch of high tech or digital companies glowing in a nice condo nearby. I can’t or don’t want to go to my favorite local retail store, but I sure can sit in my apartment and order stuff online until my credit card decays.

Neither monetary not fiscal policy is designed to fix these two tents. They add unnecessary stimulus to sectors that are growing and won’t solve the problem of stores shut down by bureaucrats. But that does not stop the politicians from trying to add more and more gasoline to a fire that won’t light.

The one positive thing that one might say is that some of the expansionary fiscal policies do help some people manage during the crisis. It gives people income who have suffered great losses. But as Keynes said in the thirties – even this won’t solve the problems of deep recession. He likened policy to “pushing on a string.” Clearly, in times of lockdowns and pessimism, people are less likely to take a government payment and spend it all.

So what do we do? First, realize that macro policies have limited value in today’s crisis. Second, rethink how we help people get through this mess. Third, make distinctions between growing and shrinking sectors. Finally, don’t waste the people’s money. Think harder about what sounds good to the media as opposed to what is really needed in 2021. We are going to come out of this with a huge debt that will have to be paid. Try to do what we can to make it less huge.