The economy before Covid-19 was starting to show the wear of a long-term boom. The Fed funds rate was cut in July of 2019 and has continued on a downward trajectory. The yield curve flipped in the summer of 2019, showing that short term investments were favored over longer term investments, which does not bode well for a robust economy. In the Oklahoma economy both natural gas and oil prices started dropping in January of last year (2020). The rig count, the number of oil and natural gas wells that are currently being drilled, had a sharp downturn in the second half of 2019, with the number being cut almost in half from 96 in July to 51 in November. It is fair to say the economy could have been doing better leading into the Covid-19 crisis.
Then the government decided which jobs were and were not needed and some businesses were shut down. Which businesses were allowed to stay open was seemingly random with some businesses favored over others. The closures put undue hardship on businesses that were already faced with a lackluster economy. During this period many businesses that supposedly closed temporarily never reopened. How could the price of such an intervention be truly measured? What is the cost on the economy of businesses forced to close because of government regulation? These questions cannot be answered.
Closing one business does not just affect that business; it has rippling effects through the economy whose costs are impossible to truly know. Every job has a part to play in a vastly dynamic supply chain of labor and it’s impossible to know the outcome of the reduction of that job before it happens. It simply cannot be calculated what those jobs provide to the economy. A baker is not simply someone who provides bread or baked goods. A baker is also a purchaser of flour and sugar. The baker’s supply chain further extends to the farmers and mills in which the ingredients are grown and produced. The loss of the baker from this chain could cause all the other links’ prices to fall and could affect farmers’ plans for next year’s crops.
Without government intervention an economy finds its highest and best use for limited resources. This idea is the invisible hand, an idea where, as individuals act in their perceived best interest to further themselves, everyone benefits. This superior allocation of resources is unseen and taken for granted, but when compared to markets with restrictions, it quickly shows itself. For example, this is perceived easily in comparing the electric market in Texas (quasi free market) to that of California (highly regulated), where California’s electricity prices are nearly double. This is not to say that price is the only efficiency factor to take into consideration given other issues, such as pollution. Price does, nonetheless, dramatically demonstrate the impact of government intrusion in markets.
The interactions of the government are clearly seen in higher labor prices. Those who received unemployment benefits often made more than had they gone back to work, causing inflation in wages. This inflation of labor prices has continued with the return to work incentive paying people to make their own money. Until the extra federal funding for unemployment stops at the end of June, the Oklahoma government is using federal dollars to incentivize both, those working and not working. These incentives are a reaction to the poor planning nearly a year ago. The constant influx of money to the economy will no doubt leave its mark with inflation, which has already started.
There are also ghosts of bad policies past in the shortages of chicken and lumber, accompanied with surpluses in office space and toilet paper. These mismatches in the economy happen when the invisible hand loses its grip. Without each individual actor allowed to do what is in their own best interest, inefficiencies are created, seen now with obvious imbalances in demand and supply.
During the last year a lot has happened. Labor has become relatively more expensive. Interruption to supply chains through closures and other government intervention has caused shortages and surpluses. Policies at all levels of government are gearing for inflation and distorted costs of, well, everything. Though the economy was not at its strongest before Covid-19, it was not allowed to go through a normal business cycle. Businesses that were not faring well before were given help as if they were not struggling before. For an economy to foster and grow there must be booms and busts that are allowed to naturally play out. The interventions in the economy of the last year will translate into unintended consequences which will negatively affect the economy for years to come.
Jason Lawter is Fiscal Policy Fellow at 1889 Institute. He can be reached at [email protected].
The opinions expressed in this blog are those of the author, and do not necessarily reflect the official position of 1889 Institute.