Economist Vernon Smith, winner of the Nobel Prize, says he expects the economy to rebound quickly after the coronavirus pandemic — as long as the government stays out of the way.
Smith, who shared the Nobel Prize in 2002 for helping create laboratory simulations of marketplace behavior, said West Germany rebounded quickly in 1948 after the government got rid of price controls.
“Smith cites the ‘German Miracle’ from 70 years ago, the rapid rebound of West Germany once price controls were lifted and Germans were allowed to restore businesses destroyed by the Allies in World War II,” according to an article in Zenger.com.
“In one six-month period in 1948 following the reforms, the country’s industrial output increased 50%, and West Germany saw annual growth of 8% throughout the 1950s,” he wrote.
Smith, of Chapman University in Orange, California, said government policies to cushion the effect of disruptions today could unduly cause those prices to spike by unleashing demand that outstrips the supply of goods and services that our addled workforce is able to deliver when recalled. Shortages could in turn lead to new controls. …
“I would say economic activity will return quickly; expectations will be buoyant as everybody looks to recovery, not further decline,” said Smith. “This is why SUSPENSION seems like the right word.” There’s a hit to wealth, sure, but a wealthy country can absorb that and go on.
Still, the professor has seen too much —he’s 93 years old—to assume people learn from history. “Remarkably, people generally don’t learn from national ‘experiments’ like the German…. People have no conception of free economies as self-organizing systems, in which specialization of labor and capital is driven by people’s choices governed by prices, as a coordination system supporting vast cooperation.” Panic hoarding of goods, such as lately in the U.S., is a distress signal that can trigger its own timely response. “The coronavirus exposes that invisible truth, but few learn the appropriate lesson from it.”
Unemployment is expected to soar to 15% during the second quarter of the year, while the U.S. gross domestic product (GDP) is set to plunge by 34% as the coronavirus slams the nation’s economy, according to a forecast by Goldman Sachs released last week.
The forecast, titled “The Sudden Stop: A Deeper Trough, A Bigger Rebound,” says it is “making further significant adjustments to our GDP and employment estimates. We now forecast real GDP growth of -9 percent in Q1 and -34 percent in Q2 … (vs. -6 percent and -24 percent previously) and see the unemployment rate rising to 15 percent by midyear (vs. 9 percent previously).”
The investment bank’s previous report, headlined “A Sudden Stop for the U.S. Economy,” had predicted only a 24% drop in the GDP for the second quarter (which includes April, May and June). That report predicted the unemployment rate jumping to 9%.
Some economists have predicted a “V-shaped recovery,” a steep rise after the sharp drop caused by the virus. Others think that won’t happen.
“What is more likely to happen is an economy that might rev hard at first but may be prone to sputtering, stalling and wheezing before finally hitting cruising speed,” CNBC reported Monday.
“The prospects of a ‘V’ recovery, where the big downturn is matched by a violent upswing, diminish each day the economy is handcuffed due to the coronavirus containment measures. Consumers suffer more damage, cash-strapped small businesses edge closer to the brink, and questions linger over whether the arrest of the COVID-19 bug will be only temporary,” CNBC wrote.