When the Kobe earthquake struck Japan in 1995, the Japanese stock market was initially unaffected falling in value by only 0.1% the following day. However, four days later it fell 5.6% for a cumulative drop of 7.2% over the week following the earthquake.
One of the reasons for the delayed reaction was, although there was great damage, many investors and traders initially saw opportunities and a bright future for companies that would be involved in the rebuilding. It was believed the Japanese government would need to provide funds for the rebuilding of Kobe through fiscal stimulus and the resultant growth in GDP would almost exactly offset the economic damage caused. This argument lost out to the obvious refutation that if natural disasters were good for economic growth why did governments not simply create them with a “bomb their own cities” as a policy to stimulate growth?
A similar economic logic appears to have been applied to the COVID pandemic. While there was a global recession as economies locked down, the bounce back in global GDP growth caused by government stimulus returned many economies to more or less where they were economically before the pandemic with no loss of trend growth. There was a widespread belief the economic damage caused by lockdowns and other measures to limit the health impacts had been largely ameliorated by the stimulus measures with minimal side effects.
The graph below shows the massive impact (in historical terms) on the Australian economy of the pandemic, but then the equally spectacular recovery with seemingly no permanent loss of GDP over the period, with the previous growth trend appearing to be maintained.
In a similar vein to the “bomb your own cities” argument, if government stimulus could completely offset the economic damage why not manufacture deadly pandemic viruses in labs and release them every few years to stimulate economic growth? Alternatively, to avoid any negative health consequences why not simply give the population an extended holiday on “Jobkeeper” every couple of years and watch the economy roar back with a vengeance when you re-opened businesses and everyone had money in their pockets ready to spend after a relaxing and refreshing few months sitting on the couch watching Netflix? Where does the money come from? No problem; fund the “stimulus cheques” by simply printing the money through Quantitative Easing.
The reason this policy was never pursued in the absence of the pandemic (apart from being clearly “mad”) was because of what is currently occurring now in the “hangover period the morning after the economic party the night before”. Excess stimulus (or at least the after effects of the necessary stimulus) has caused the current inflationary pressures, both directly through funding pent up demand and indirectly through disruptions that have limited supplies of goods and services which has become a global problem. Interest rates are now rising to combat rising inflation with the resultant slowdown in global GDP and likely recessions to follow in the UK, Europe, USA and possibly Australia.
The policy responses to the pandemic almost certainly minimised the overall economic damage and to implement them was good policy, but the consequence of avoiding immediate pain has simply been to push the problem further into the future. Using a simple analogy, if you wreck your uninsured car you can take out a large loan to buy a replacement vehicle so you can still get around. In the short term, your life is unaffected or possibly even enhanced with a newer and better car, but it is only in the medium to long term when you need to divert funds you would have otherwise used elsewhere to repay the loan that you suffer any lifestyle pain.
The truism is that when an event happens which is economically destructive (and as can be seen from the graph above the pandemic was highly destructive to the Australian economy), fiscal and monetary policy responses can minimise the damage but never completely offset it otherwise artificially creating that event or simply the policy responses to it would be good economic policy regardless of the event occurring.
Only when explained in terms of “bomb your own cities” or “manufacture and release your own plague” it’s clear these ideas are nonsensical. To paraphrase Paul Keating’s famous 1990 quote after the financial excesses of the late 1980’s “This is the recession we had to have” or at least the economic slowdown now necessary to pay for the lost GDP from the pandemic.
