Soviet Style, from the Top Down: The Reality of Central Planning

Dear Reader,

If you’ve ever wondered what it was like to live in a planned economy, now you know. Politicians and planners (and central bankers) believe the economy is a machine. When there’s global pandemic and it’s an especially contagious virus, pull the emergency break.

Flick the off switch. Send everyone non-essential home and lock it down. Do not collect a Quarter Pounder at Maccas. Go directly to home/jail.

Now, after much back slapping and self-congratulating at Australia’s enviable infection and death rates, it’s time to release the inmates and put them back to work. This weekend National Cabinet revealed its three-stage plan to ‘open’ Australia by July. For governments, getting free enterprise to work again comes down to a ‘to-do list’. I’ll come back to that.

What’s the plan? First, open up the cafes, pubs, bars, and restaurants — but with restrictions on how many people can be inside (social distancing). Five people can come in your house. 10 can be at your wedding. And 20 can come to your funeral (30 if it’s outdoors).

Step two is basically the same but it doubles the number of people allowed. And it includes the possibility of non-essential interstate or regional travel (freedom of movement will be permitted, albeit in a limited way). Cinemas, art galleries, zoos, swimming pools, tattoo and massage parlours will be back in play. Night clubs and casinos will remain closed.

Step three is all of the above but with 100 people. And if the states permit it, travel between them. Also, if Jacinda Ardern allows it, you might be able to fly New Zealand and enjoy lockdown life there. So we’ve got that going for us.

The planners hope all this can happen by July. But they’re leaving out an obvious calculation: will Australian businesses go along? It might not make much sense for you to hire staff and stock inventory if you can only have 10 diners in your restaurant. And no allowance seems to be made for the size of a venue. Surely you can fit more than 10 diners in most hotel dining rooms.

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A revolution that snuck in while we were all locked down

The trouble with plans is that they come, Soviet style, from the top down. In an open society with a free market, plans are made from the bottom up, at the individual and small-business level. People are free to make their own economic calculations with information no planner could possibly know. They open businesses, take out loans, buy houses, switch jobs and buy (or sell) stocks based on what’s best for them.

That all changed in the policy-driven response to COVID-19. Australia went, overnight, and without so much as a vote cast, from a free market society to a centrally-planned economy, directed by people who’ve never successfully run a lemonade stand, much less a small business. It was a quiet revolution that snuck in while we were all locked down.

Now the government is making plans for everybody and spending money like it’s literally no object. A big part of that plan is to, directly or indirectly, subsidise over half the total Aussie work force of 13 million people. Between the public service (2 million), JobKeeper (5 million) and JobSeeker (1 million), 61% of Australia’s workers are paid in full or in part by the government. It may not be fully Soviet, but Lenin would surely approve.

You don’t have to know much about economics (or even history) to know that this isn’t sustainable (at least not without a huge increase in the public debt). Workers pay taxes to support government spending. If those workers aren’t working, where is the money going to come from? The printing press?

Massive government borrowing eventually results in inflation and declining standards of living. It’s the easy way out. But it’s not really a way out. It’s a way down, toward a lower quality of life for everyone in Australia.

Perhaps this is why the Morrison government announced this morning it would seek to begin winding back JobKeeper and JobSeeker in July. The original plan, when it was announced, was to keep both programs around until September. What’s changed?

We cannot all live at each other’s expense indefinitely

Unemployment could hit 10% in the second quarter, according to figures from the Reserve Bank of Australia. GDP could fall by as much as 10% in the first half of the year, and 6% for the whole year (assuming a huge recovery in the second half). Meanwhile, the government’s budget deficit could easily exceed 7% of GDP.

These are all just numbers. But they illustrate a simple economic point made by the French economist Frederic Bastiat: We cannot all live at each other’s expense indefinitely. Someone has to generate the wealth. Someone has to produce for the government to tax and redistribute. When you shut the productive economy down, it’s only a matter of time before producers go on strike.

The strange thing about this particular point in history is that people are taking the streets for the right to work, not the right to strike! In Berlin, all over America and even here in Melbourne, ordinary people are defying lockdown orders to protest their right to work and move freely. That puts pressure on the planner to relax restrictions lest ‘the people’ become more unruly.

The ‘safe’ policy play is to keep it all locked down for as long as people will endure it. That way, if you’re a politician, you can’t be blamed for allowing a ‘second wave’ or a new ‘cluster’ or ‘flare-up’. But there are emerging clusters of dissatisfaction in the general population. And plenty of political flare-ups to look out for.

A full discussion of the political limits of lockdown (or, indeed, of its public health merits) is beyond the scope of today’s letter. The real task is to figure out what to make of all of this for investors. The market looked into the abyss in March and priced it in. Was it right?

When markets function correctly — when government intervention doesn’t distort prices — they look to the future. That’s what markets are supposed to do. They try to look ahead and tell us the present value of future earnings.

The market seems to be saying the future will be just fine. Businesses will open, consumers will borrow and spend, earnings will rebound and stocks will go up. The plan worked. Now let’s get back to work!

Here’s the thing about central planning: it rarely survives first contact with reality. Reality is that unemployment in Australia will stay high for years. Burned by the precedent of overnight government lockdowns, businesses will think twice and then a third time about hiring and making investments. The recovery in jobs (and earnings) will take longer than most expect.

And in the meantime, the political pressure will come to make JobSeeker and JobKeeper permanent. If we can do it in an emergency, why can’t we do it all the time? This represents a radical shift to Soviet-style government intervention in labour markets and the free markets. If it lasts, then there’s one thing you can be sure of: we’ll all be poorer for it.


Dan Denning,
Editor, The Rum Rebellion



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The Rum Rebellion