Martin Wolf Isn't the Solution to 'Secular Stagnation,' He Is Secular Stagnation
In 1997 Tiger Woods won the Masters in dominating fashion, and was seemingly on the verge of a string of wins that would firmly put him miles ahead of his alleged peers. The problem is that he wasn’t happy.
Without trying to analyze the endless thought and engineering that goes into the swinging motion of one of the greatest golfers ever, Woods watched his Masters performance in dismay. He didn’t see one flaw in his swing, he saw ten. And so it goes. Despite crushing the competition in what is golf’s most coveted major, Woods went to work in order to fix his swing. That he did is instructive economically.
It’s a reminder that the most successful individuals and businesses routinely rush to fix their weaknesses ahead of them being exposed in the marketplace. They understand that while sheer talent can mask mistakes in the near term, eventually what they’re doing wrong will reveal itself in ways that suffocate performance. The great Ed Catmull (founder of Pixar) used to be uncomfortable when movie productions were going exceedingly well. He knew his comfort was blinding him to serious errors that would eventually result in lousy reviews, and subsequently poor box office.
In an economic sense, this is all a reminder that the habits and mistakes that hold us down generally rear their heads during periods of success. Looked at macro-economically, economy-sapping errors take place during the booms, while recessions are the stretches of time during which the errors are realized. And ideally fixed.
To the great achievers like Woods and Catmull, “recessions” are most certainly not situations to avoid. Instead, they’re the necessary periods of reflection and correction that result in greater achievements down the road. Though Woods’s efforts to fix his swing materialized in a string of tournaments that concluded without him hoisting the victor's trophy, that he rushed to fix his errors before his competitors exposed them meant that Woods ultimately went on the most dominating run of success that golf has ever seen.
It’s all a reminder that painful as they are, recessions are a necessary driver of progress. They signal the recovery on the way. They do because recessions are merely relatively slow periods during which bad habits are fixed, bad hires are released so that they can more correctly match their skills with more ideal employers, bad investments are mothballed, and lousy companies are put out to pasture so that their crucial assets can be directed to higher uses.
Basically boom times are lousy teachers, to paraphrase Bill Gates. And because they are, it’s not unreasonable to point out that bad habits, hires, investments and companies emerge during booms. Recessions are a cleanse of what doesn’t make sense, or that’s ailing the economy, so to fight recessions is for governments to fight recovery. Recessions are the recovery.
All of this came to mind while suffering through a recent opinion piece by Martin Wolf at the Financial Times. It’s rare for Wolf to come across a government intervention that he doesn’t like. In Wolf’s case, it’s more about choosing which intervention is better than the other. Letting the markets work on their own, free of the insights of people like Wolf and the profligate government officials he venerates, is a non-starter. With recessions, Wolf is very clear that government must respond.
It just never occurred to Wolf that maybe the errors built up during a boom are corrected during recessions. To him, government must act. Always.
Applied to the column previously referenced, Wolf observed that “[W]hen recessions hit, real short-term interest rates need to fall sharply and the yield curve needs to become strongly upward sloping if monetary policy is to stabilize the economy.” Where does one begin?
For one, no one borrows money. They borrow what money can be exchanged for. So to believe, as Wolf does, that recessionary periods result in easy borrowing is for him to misunderstand the basics of how finance works. Forget what central banks do, they can’t decree easy credit. During slowdowns, credit’s going to be more expensive simply because those with actual access to funds are not going to cheaply lend what is heavily demanded but in short supply. Thank goodness they won’t.
Lest we forget, recessions are the periods during which mistakes are fixed. Because they are it’s only natural that credit wouldn’t be easy. If easy, the need to fix what’s wrong wouldn’t be as great. Figure that few can look inward as critically as Woods and Catmull do, so since they can’t, market-driven credit scarcity forces what might otherwise not take place.
As for “monetary policy,” what could it do to soften a recession? If Wolf means “easy credit,” he’s just confused. Much as he wishes otherwise, central banks projecting their well overstated influence through antiquated banks can’t alter reality. Looked at stateside, credit’s always going to be tight in East Palo Alto, but it’s generally always going to be plentiful and intrepid in Palo Alto itself. As for money itself, it just is. It’s generally plentiful in Greenwich, but scarce in Bridgeport. Central banks can't alter these truths.
But wait, Wolf might say. He’s not calling as loudly for monetary responses to downturns. While he confusedly believes “[W]e need more policy instruments” to fight recessions, he believes “the obvious one is fiscal policy.” As the thoroughgoing Keynesian puts it, “[I]f private demand is structurally weak, the government needs to fill the gap.” Except that it can do no such thing. Government can only “demand” things insofar as the private sector first produces first. Wolf misses that government can’t demand as much as it can extract demand from the private sector. There’s no increase. There’s just a politicized allocation of crucial resources over a market-driven allocation of same. Government spending is a burden on growth, not a driver.
Better yet, private sector wealth is hardly stored under mattresses. If it’s not being spent by its producers, it’s logically being saved; meaning consumptive power is being shifted to others with immediate needs. Or better yet, it’s being shifted to existing and future businesses in need of growth capital.
So while governments should never fight recessions as Wolf would naively like them to, they should certainly do less. Basically governments should do the opposite of what Wolf is calling for. Wolf wants governments to spend, but doing so would amount to empowering politicians to misallocate precious resources over leaving those resources in the private economy. Translated for American readers, Wolf’s nauseating solution to slow economic periods is to let Nancy Pelosi, Mitch McConnell, Chuck Schumer and Donald Trump control a bigger portion of the economy; Peter Thiel, Jeff Bezos and Fred Smith (FedEx) less. It would be funny if it weren’t so sad.
The reality is that recessions signal the boom on the way for them existing as certain evidence of errors being realized – and fixed - by the individuals who comprise the economy. Wolf, in his infinite wisdom, is calling for government to enable the perpetuation of what’s holding the economy down.
It's hard not to laugh, but Wolf's pretense is that government planning that always suffocates progress has a stimulative purpose during recessions. No, that's not serious. Central planning failed for good reason, and to believe it works in response to recessions is the height of naivete. Wolf aims to reduce the pain of slowdowns, but is blind to how very much his solutions would make them permanent. Martin Wolf isn’t a fix to “secular stagnation,” rather he is secular stagnation.