Our economy has taken a real hit during the crisis. It’s been hit hard because so much of it is service sector. With pubs, restaurants and entertainment centres closed, and people staying indoors, much the economy has shut down, and needs to be restarted.
Some suggest public stimulus, shoveling public funds to favoured sectors to restart them. No. It doesn’t work. It takes cash from those who might have invested it wisely, and lets ministers and civil servants invest it unwisely.
Others advocate central planning to regulate and steer the economy into recovery. Again, no. That doesn’t work either. Central planning by remote bureaucrats with nothing to lose is not a patch on individual planning by those with skin in the game.
Fortunately, history has given us a lesson in something that does work. Postwar West Germany was a basket case, its industry smashed and its infrastructure in ruins. The shops were empty and the people unemployed and under-nourished.
Economics minister, Ludwig Erhard, staged an economic coup over a weekend in June 1948. He abolished price controls. He introduced a new currency, the Deutschemark, and removed allocation and rationing regulations. He dramatically cut the top income tax rate from 95% first to 50%, and then to an effective rate of 18% for most earners.
It’s said he did it over a weekend when the Allied generals running Germany would be out playing golf. It became known as the “Bonfire of Restrictions.” He exceeded his authority, but he got away with it. The commanding US general called him on Monday to report that his economic advisors were telling him these moves were very dangerous. Erhard replied “That’s what mine say.”
It worked with astonishing rapidity. The shops began to fill from the Monday as farmers thought produce now worth selling at market prices instead of fixed low ones. People began to go to work, now they could now keep most of their wages. Industrial production was up 50% by Christmas, and the economy never looked back. It became the German Economic Miracle, and made West Germany an economic powerhouse, while the UK languished under regulation, rationing, and state controls.
It points a way forward for the UK after the epidemic. The answer is not higher taxes with state regulation and direction to reboot the economy. It is to make a bonfire of restrictions, as Germany did, and to lower taxes to make enterprise more worthwhile. It is to remove the barriers that limit and dampen the entrepreneurial spirit, just as Erhard did, and to let a freed-up economy kickstart itself by seizing and developing the opportunities created.
It is to recreate here an economic miracle that has proved in practice that it works.