Pandemics Are Not Recessions, And Pessimism Isn’t Logic

I thank Dr. Edwin G. Dolan for taking the time to critique my recent Independent Institute Executive Summary, A Pandemic is Not a Recession, in his April 15th blog posting for the Niskanen Center, “The Shaky Logic Behind Hopes for a Quick Recovery.”

Criticism is valuable and necessary—though inaccuracies need to be cleared up first.

  1. As Ed says, intangibles such as employer-employee relationships, supply-chain relations, and lender-borrower relationships can’t be “turned on and off” at will. But I don’t join him in blaming the virus for the harm done. I see the greater part of it as arising from unfocused mandatory shutdowns and other government actions.
  2. Without evidence I don’t think he or I should be using adjectives like “very important” or “critical.” Whether they are justified remains to be seen. My impression is that businesses are amazingly adaptable. Supply-chain vulnerability was cited widely as a reason to expect President Trump’s unfortunate trade wars to cause a recession that never came.
  3. I accept that there will be many bankruptcies, and that bankrupt entities “cannot instantly or painlessly be brought to life” again. But a macro “drag” is not predictable simply by adding up all the micro delays—it’s not a linear function. Firms that are in better shape will be quick to pick up market share from those that can’t move fast enough. And there’s plenty of time to foresee opportunities before shutdowns lift.
  4. I question whether bankruptcies are a drag on the economy. We all can see causation going from economic drag to bankruptcies, but what’s the evidence that causation goes the other way as well? Maybe bankruptcy is creative destruction. Ed must be aware that the US small business sector is energetic and resilient despite the failure of twenty percent of all small firms in any normal year (see “Business Employment Dynamics,” Chart 4, U.S. Bureau of Labor Statistics).
  5. Ed is wrong to call me “indifferent” to the obvious fact that the economic costs will be distributed unevenly. When is economic change ever equitable or “even”? On this point he also missed one of my paragraphs (see p. 2): “If output is disrupted in one period, it will be restored in another—albeit perhaps in a different form.” This was cryptic on my part, but the economy’s product mix—and the gains and losses to different parts of the economy—were outside the scope of this particular article.
  6. I don’t disagree with him that “losses to the former will exceed gains to the latter,” but my question is whether the slow recovery of losers requires a slow recovery in aggregate. Logically, it’s a non-sequitur; what’s the evidence for it?
  7. In sum, Ed should not have referred in his title to “shaky logic” on my part. His points, whether accurate or not, are expressions of opinion or prior belief. And his last paragraph is a caricature. I haven’t said or implied that “everything will be fine.” Finally, I hope he doesn’t actually believe that people who advocate “staying calm” are “dangerous”!

In closing, I want to explain that, while fully aware of the suffering and economic costs arising from this crisis, I don’t mean to be callous, and I don’t have all the answers. I’ve avoided emotive words so as to keep a clear head.

R. David Ranson is a Research Fellow at the Independent Institute and the President and Director of Research at HCWE Inc. (formerly H.C. Wainwright & Co. Economics).
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