The Trump Administration continues to flounder in deciding what is needed to keep the economy going in the midst of the ongoing pandemic. Do we give everybody a check? How about a payroll tax cut? The difficulty arises from the very nature of this crisis and the abject misunderstanding of economics that macroeconomic theorizing has taken us for the last almost 100 years. Our modern “understanding” of the economy teaches us that the problem of the macroeconomy is that of ensuring we have enough demand, and it has the attendant political response of “how do we keep people consuming.” If the economy is sluggish, we obviously then need to stimulate it–the economy needs a jumpstart. In the halfway house between free markets and socialism (the reality of most of the world), we use government policy to bridle the alleged excesses of markets, as well as get them going when they’re down.

Now I argue that this is the wrong diagnosis all the time, joining with classical economists who understand that economic downturns always begin on the production side of the economy, and is only revealed on the demand side of the economy after the misallocation of resources has taken place. In the classical view, it is production which provides the potential to consume–not the other way around. But ever since Mr. Keynes’ knocked down his straw man caricature of Say’s Law, where he interpreted it to be “Supply creates its own Demand,” we are living in a Demand world.*

But this virus defies a demand solution. It’s obviously true that there is not enough effective demand for much of our economy, but not because people don’t want to purchase goods and services. Rather our problem is that we are not allowed to purchase goods that we want as in many cases businesses are not being allowed to produce what we’d like to buy. The fundamental problem is that we are not producing as much as we were before, and every day more parts of our economy are being restricted from production. Attempts to stimulate consumption when we are not being allowed production are therefore doomed to failure.

There may be some need to help on the demand side with lost purchasing power on the other side of this crisis, and there is need to make sure that people get to stay in their current housing and have enough money to buy food/medicine and the essentials of life. We have existing social safety nets here, and there may be room to expand these on a temporary basis. But rather than the usual Washington foolishness of talking about whether firms that get a bailout should ever be allowed to do stock buybacks, we need to be thinking about policy that will allow us to produce again and get back to work. No country, even one as strong as the U.S., can afford to effectively shut down for more than a few weeks. Certainly not months. And its true we may be dealing with this virus for many months. So the burning practical political problem is how do we structure our economic life to operate concurrently with a significant health threat?

As the economy continues to grind lower, and government continues to prohibit production, you are going to see push back as peoples’ livelihoods and businesses start to go under. I think this pressure is even now beginning to surface. At some point soon, we need to resume work. How do we do so in the safest, most prudent manner possible? What can we do to prepare our health system for the restart of the economy? These are the questions we must be addressing–not arguing about stock buy backs.

* Please see my Chapter 17 of my book for a much more descriptive review of this.