Ignore the Keynesian Corona Pundits, a Spending Slowdown Is the Economic Cure

“Capitals are increased by parsimony, and diminished by prodigality and misconduct.” – Adam Smith, The Wealth of Nations, p. 367

“Raising money is hard. Over my career of leading multiple companies, I have talked to more than a hundred institutional investors and have reached a deal exactly once.” Those are the words of Joel Trammell. Though the Austin, TX-based serial technology entrepreneur is expert at building companies, his admitted weakness is in the area of securing capital for same.

About money and capital, it’s worth digressing however briefly before getting to the main point of this piece. Money is only useful insofar as it’s exchangeable for real resources. Dollars command resources around the world, so do euros and so do yen, so for the purposes of this piece let’s consider “money” in the dollar, euro and yen sense. Dollars, euros and yen are, as close to “capital” as we can get in this day and age. Though the three floating currencies are far from perfect, they can be exchanged for capital goods quite readily.

Money of the dollar, euro and yen variety “is hard” to raise or find, and it is precisely because demand for capital goods like computers, office space, trucks, tractors, and labor well exceeds supply. Translated, entrepreneurs and businesses are relentlessly bursting with growth ideas, but what limits them is availability of money.

Which brings us to the virus that is seemingly on the minds of everyone of late: Coronavirus. The aforementioned virus’s contagious qualities to varying degrees have individuals the world over scared, and as a consequence, airplanes, hotels, shopping malls, restaurants and all manner of other public spaces are said to be rather empty; that, or not as heaving as they normally are in normal times when fear doesn’t inform the thinking of so many.

As readers can likely imagine, the big decline in consumer spending that the above paragraph alludes to has the pundit class up in arms. Alarmist by nature, and Keynesian by orientation, they equate reduced consumption with economic decline, with slowdown, with “recession.” They know not of what they speak.

Missed by the alarmists of all ideologies in the pundit class is that consumption is our natural state. We all have endless wants, but our desires are constantly limited by how much we produce. Increased savings set the stage for more production. 

At risk of being overly blunt, consumption-focused Keynesians get it backwards. Which means the pundit class almost monolithically gets economic growth backwards. That the pundits misread the meaning of reduced consumption in the present should, in a free scenario, have readers more and more optimistic. Simply stated, the consumption slowdown that has them wringing their hands is a sign of economic revival for it signaling increased capital availability. In other words, the consumption slowdown is the recovery. Think about it.

Investment is what powers economic growth, principally because investment is all about matching individuals and businesses with savings (substitute in here “capital” or “investment” if you desire) that enable greater and greater production on the part of workers. Making basic what is, a worker with a high-speed WiFi-enabled computer, a smartphone and a car is going to operate exponentially more productively than will one with a typewriter, a landline phone, and a bike to get to the U.S. Post Office with. 

Consumption is a consequence of economic growth, not the instigator of it. Consumption is a consequence of production that is a consequence of investment.

Thinking about investment and the copious production that springs from the matching of businesses and workers with capital, the alarmist pundit class is once again wringing its hands over reduced consumption as the inciter of slowdown. As previously mentioned, they know not of what they speak, or write, or blog.

They miss the basic but rather crucial economic truth that entrepreneurs and businesses are waging a perpetual competition with consumers for precious capital that is always and everywhere expensive, and in short supply. Of course, if people are spending less they’re logically saving more. Though Keynesians reside in a parallel universe in which unspent savings sit idle under beds and locked in safes, in this universe “money” never sits idle. That which is unspent exists as investment capital for the businesses and entrepreneurial ventures that never have enough of it.

Missed by the pundit class is that capital is quite a bit more difficult for businesses to acquire than customers. In Trammell’s case, he was and is expert at building businesses, but capital raising has long been a weakness. Trammell’s plainly not unique as the high and well-justified pay of investment bankers attests.

Looking at the present, what signals slowdown to the talking heads actually has bullish qualities as the quantity of capital is set to soar. Per Adam Smith, “Every increase or diminution of capital, therefore, naturally tends to increase or diminish the real quantity of industry, the number of productive hands….” The problem, as parsimony increases savings alongside the possibility of more investment, is that government hysteria and force (see: Austin, TX, South by Southwest, President Trump's shuttering of European travel into the U.S., the lockdown of Italy's economic center, etc.) are crippling business activity while at the same time foisting wasteful consumption on an economy that desperately needs more savings and investment. 

The consumption slowdown that has the deep thinkers, academia and politicians up in arms would, in a world free of political meddling, be a sign of economic rebirth as entrepreneurs and industry yet again attain a greater share of productive capital. It’s all a reminder that government needn’t do anything in response to the Coronavirus scare. As the consumer pullback indicates to the mildly reasonable, a private-sector economic cure is already in the works.

Except that as this is being read, politicians are "doing something." And in doing something they're stepping on the cure's neck. Give it time, but history will conclude that political class ineptitude yet again turned a challenge fixed by increased capital availability into a needless market and economic calamity.