Destroying the Economy is not a Social Policy

Destroying the Economy is not a Social Policy

Daniel Lacalle 31/03/2020 6

The economy is the heart of the social body. If we shut down the heart of an organism to safeguard the hands and brain, the body dies.

The data on deaths and infected from the Covid-19 coronavirus epidemic is alarming. Let us remember the deceased, the infected and their families, and applaud the response of civil society, businesses, and citizens.

A pandemic crisis is addressed by providing safety protocols and sanitary equipment for businesses to continue to run and keep employment, not shutting down everything, which may create a larger social and health problem in the long term regardless of the massive liquidity and fiscal policies. Why? Because demand-side policies never work in a forced shutdown of all sectors. There is no demand to “incentivize” when the government orders the closing of all activities. And there is no supply to follow when the economic crisis creates a collapse in employment and consumption.

Many commentators are saying that shutting down the economy is an essential measure to gain time to control the virus. This analysis comes from people who simply do not understand the ripple effects and massive ramifications of a complete shutdown. They perceive that it is small collateral damage because they also believe that everything can go back to normal in one month. They are wrong. The impact is severe, widespread and exponential.

The decision to shut down the economy may cause long-lasting damages to job creation and businesses that cannot be unwound in a few months. Yes, it is essential to contain the virus spread and drastic measures are warranted, but we cannot forget that each month means millions of unemployed and thousands of business closures.

Each month of lockdown means more than millions of unemployed. It means thousands of businesses that go bankrupt and have to close forever. This debunks the V-shaped recovery theory (even with Congress package, which does not address the working capital nightmare unraveling). The best course of action to tackle the health crisis, as well as the economic collapse risk, is to follow the South Korea and Singapore strategy. This is not a spending crisis, but a test and prevention crisis.

The healthcare crisis has to be tackled from three angles: prevention, testing and ensuring that treatment and vaccines will be widely available when ready. If governments fall prey to panic and destroy the economic fabric of the country they will add poverty, misery, and bankruptcy to the fatalities of the epidemic, thus creating a larger, longer-lasting social and health depression.

The debate in the media has tried to focus on the issue of austerity and government spending as if this had been solved by having massive budgets.

This is not a crisis due to a lack of health spending but from the lack of foresight, prevention, and management of some countries.

South Korea, with 51 million inhabitants, is one of the countries with a higher ranking in economic freedom (ranked 25 globally), public spending to GDP is much lower than most leading economies, at 30%, and per-capita health expenditure is much lower than in the EU or US. South Korea is also a world example in managing the pandemic, with 139 deaths and 9,332 cases at the end of this article. The same can be said of Singapore, also a leader in economic freedom and with much lower spending to GDP (18%).

On the opposite side, Spain or Italy, with large government spending (above 40% of GDP) and vast public healthcare systems, stand unfortunately at the top of the list in deaths. There may be many factors involved, but one is clear. More spending is not the magic solution to a crisis generated by poor prevention and mismanagement.

What has been the success of the leading countries? Little bureaucratic administration and a fast, effective and efficiently managed prevention, analysis and containment system.

Any Spanish or Italian citizen can understand that the accumulation of inefficiencies they have experienced in managing the pandemic would have been the same if in the past they had spent much more because resources would have been allocated to other things, not to an epidemic that the governments failed to recognize. It is a management problem, not necessarily of funding, and much less of funds managed by the government.

This leads us to another fallacy which is the concept of “public health” when what most politicians want to impose is “political health”. An efficient public service health system not only does not have to be a single-payer but much less a single manager and less so a political one.

Recall that in July last year that same government called on the autonomous communities to reduce spending on Health (“urgent plan for adjustments in pharmaceutical and health spending”, demanding measures “in the outpatient and hospital pharmaceutical provision, as well as in health products” ).

Public services and the private sector are giving everything and more in this crisis. This is the evidence of social capitalism that I comment on in my book, Freedom or Equality (PostHill Press).

The crisis has shown that the only solution to future challenges comes precisely from greater collaboration, with a solid and powerful private sector. There is no public sector without the private sector. There is no public health without the technology, innovation, research, products, and drugs of the private sector. No leading state in the world faces the challenges of health in the future by imposing political management as the only option.

Everyone knows that we will need all-important competition, freedom of choice, and technological leadership to serve many more people while maximizing the use of resources. Anyone who thinks that by destroying the private sector they are going to guarantee greater and better access to goods and services has a problem with history and statistics. No leading healthcare system is only state-managed. And none works only with state-owned resources.

Health professionals do not belong to the Government. They are free individuals, many of them working in the private and public sector at the same time, and they are part of civil society that provides a service with their magnificent work, which we taxpayers pay for.

This crisis has demonstrated the reality of capitalism as the most efficient and social system. Companies and self-employed workers have responded in an exemplary way. The number of businesses, entrepreneurs, and organizations that have acted quickly and efficiently to support countries like Spain or Italy in difficult times is enormous. Unfortunately, these days the examples of solidarity and contribution shown by anti-capitalist agitators are almost non-existent.

It is curious that those “anti-capitalists” who previously encouraged debt defaults and anti-business slogans today demand the most capitalist instruments in the world, support from the balance sheet of multinationals, multibillion-dollar bond issuances that they will have to sell to the investment funds they hate, and massive debt that will be financed by the investors they abhorred, with investments that will be made by the companies they condemn and giant loans from the banks they wanted to destroy. I have never seen more capitalist anti-capitalists.

Thanks to capitalism, we are going to get out of this crisis of poor prevention and worse management in a record period, if there are no more obstacles for economic recovery. In socialism, we would be forced to choose between misery and more misery, added with repression once the citizens began to show their discontent with the Government.

When the Government stands as the only power without checks and balances, the door is opened to incompetence, authoritarianism, and misery. Competition is essential for progress. The moment competition and freedom are curtailed, progress is destroyed.

That is the great advantage of a free economy. Progress in competition and freedom. The government is at the service of civil society and taxpayers, and not the other way around.

This crisis is going to destroy millions of jobs, but these can recover quickly and heal the economy if governments don’t make the mistake of addressing a pandemic crisis by creating an economic depression. Spain and Italy show why this is a grave mistake. The vast majority of small and medium companies are sent en masse to collapse, leading to years of economic stagnation, poverty, and massive unemployment. Destroying the economy is not a social policy.

Governments need to provide citizens and businesses with the tools to ensure safety, not kill the social fabric of the nation.

Instead of protecting the productive fabric to create more jobs when the pandemic is controlled, some countries are going to lead hundreds of thousands of small businesses to bankruptcy. Businesses that will not come back when, thanks to science, the crisis passes.

The health pandemic will be overcome thanks to human ingenuity, science, technology, and business. The interventionist pandemic will cost a lot more, in lives, in employment, in growth, and in opportunities.

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  • Darren Jeffreys

    While the U.S. and the U.K. are still bracing for the worst, South Korea and Singapore stand in sharp contrast.

  • Jessica B

    Excellent article

  • Craig Harrison

    The difference is intelligence and less ignorance.

  • Margaret Nelson

    South Korea: Streets soaked with disinfectant spray and N95 mask are sold at a discount. Meanwhile in America: No more soap, masks and limited places in hospitals.

  • Olly Miller

    This virus is showing how far Britain has fallen.

  • Jack R

    It's pretty obvious. Early testing. That's what everyone was saying two months ago. It's really too late to get the jump on it now.

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Daniel Lacalle

Global Economy Expert

Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of EconomicsFunds Society Forum in Miami, World Economic ForumForecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBCWorld Economic ForumEpoch TimesMises InstituteHedgeyeZero HedgeFocus Economics, Seeking Alpha, El EspañolThe Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).


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