We must ensure the cure is not worse than the complaint

My friend Vernon Smith argues that the US economy is not in free fall—just standing still.

Well, he has a Nobel Prize in Economics, but I’m not so sure.

Economies often go up and down, in what economists call business cycles. But look closer, and it is not a case of everything going up, going down, and going up again. In every recession, there are real losses. Business ventures fail, factories are abandoned, people lose their jobs.

That is because, to create goods and services, capital goods—factories, shops, equipment and indeed human talent—have to be brought together, and work together, very precisely. Each part of the capital structure has to work with each other. If one part is disrupted, the whole lot is thrown out of kilter. It takes time, effort, pain and expense to reconfigure it. And things are never quite the same again.

For instance, with retail stores closed, people are turning to online shopping. They are getting used to it: they might even come to prefer it. In time, our high streets will re-open. But their customers may have abandoned them.

Or again, because restaurants are closed, wholesalers are switching their offer from businesses to individuals. When the restaurants re-open, they may struggle to find new suppliers. Some may fail.

In other words, you cannot close down an economy and then expect it to re-open as if nothing had happened. There will to be real losses, real write-offs, real unemployment, just as there are in any recession.

We can only hope that the economic cure does not turn out to be worse than the medical complaint.