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Notes on the post-COVID economy Notes on the post-COVID economy
by Joseph Gatt
2021-02-08 10:22:16
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The COVID recession is a cyclical recession with some structural elements. While the recession may be cyclical and caused by a global natural disaster (namely a pandemic), many economies around the world are trying to think about how to re-structure their economy.

The good news is economies always bounce back after natural disasters. The bad news is, there are some structural elements in the global economy that need some... revising.

So I'll give my two cents on what went wrong in the past, and how to have better economic structures in the future.

coro0001_400Organizing an economy

Organization is not the same thing as planning. Organizing means consulting on a regular basis (not just during election campaigns) to discuss how legal barriers are impacting the economy.

How do laws have a negative impact on the economy?

In a lot of countries, regulations “destroy wealth creation.” What do I mean by that.

Let's use this example. I have many friends in North Africa who are cab drivers. Let's use their example.

In North Africa, to become a licensed taxi driver, you need to purchase your own car. And in some cases it has to be a brand-new car (no second hand cars).

So your taxi will cost you 5 to 10 thousand dollars. And then you will have to fill a gas tank for 30 dollars. And then you have to pay rent and feed your family and pay a fixed tax (usually 100 dollars a month fixed tax).

But, regulations only allow taxis to charge 10 or 15 cents per mile! And sometimes it's that law! With that kind of law, if taxi drivers are law abiding, they can only make around 5 bucks a day, or less.

So the math. 30 dollar gas tank + 5,000 dollar car. And you're making 5 bucks a day. So you're losing thousands of dollars in the end.

That's what I mean by “destroying wealth creation.”

You create wealth by purchasing a car for 5 thousand bucks and you're creating wealth by purchasing a 30 dollar gas tank. But you're destroying that wealth by only being allowed to charge less than a dollar for a taxi ride.

Imagine that with a factory. You rent the land and property for several thousands of dollars. You purchase the machines for several thousand dollars. You hire engineers and floor workers for several thousand dollars. You purchase the raw materials for several thousand dollars.

BUT, in the end, the government tells you that you can only charge a dollar or two for your product, meaning you'll only be making a couple hundred dollars a day. That's destroying wealth creation.

So the economy is not rocket science. What the government really needs to do is to enable economic actors to charge the kind of money for their products that can help them break even, and make a decent profit. The rest is marketing and searching for clients and all that.

So, economic actors need to meet on a regular basis to discuss how regulations are helping them create wealth, or are destroying wealth.

In wealth destruction cycles, you have a boom and bust cycle. That is, the government and banks decide to promote entrepreneurship by dishing out a ton of loans that enable the establishment of corporations. People purchase land, cars, machines, hire people. You get a boom cycle.

But then the government places ceilings on products, or imposes ridiculous pricing on the products. You soon get a huge recession.

The inter-dependency of markets

There's a bit of a global economic eco-system that works like this:

Korea exports products to China and Thailand and Vietnam. China, Thailand and Vietnam pay Korea in dollars. Koreans vacation in China, Thailand and Vietnam with portions of the money that the Chinese and Thais and Vietnamese had paid them for their product. Then Chinese, Vietnamese and Thai hotel owners and their family visit Korea and feed dollars to Korean hotel owners.

Let's imagine that there's a recession in China. No more Chinese tourists in Korea, no more dollars for Korean products. Korean factories and hotels feel the hit, Koreans can no longer vacation in China or purchase Chinese products.

Koreans no longer have money to vacation in Thailand of Vietnam. Thai and Vietnamese hotels lose money and don't vacation in Korea. Thais and the Vietnamese purchase fewer Korean products. And the ecosystem collapses.

What's the vaccine against market dependency and the risks?

I'd say it's local production and distribution. If you're Samsung, rather than export every Samsung product from Korea, you want to set up factories here and there and sell locally. Likewise, Vietnamese factories should be allowed to operate smoothly in Seoul or Busan if they wish.

What I mean by local production and distribution is that Samsung is going to set up a factory in Vietnam for the Vietnamese market, another factory in Thailand for the Thai market and one in Malaysia for the Malaysian market.

But then, if a Malaysian businessman wants to set up a factory in Korea and that the Koreans don't allow him to do that, you'll understand that there's always the risk that the Malaysian police or army can tell Samsung to pack their bags and leave.

So reciprocity in local production should be respected. But to what extent? For the Americans, reciprocity means that Coca Cola can set up a factory in Algeria, and Algeria can set up any factory it wants in the United States. But for the Algerians, reciprocity means Coca Cola can set up a local factory, but in exchange for the US providing a visa to any general and his family members, or any government official and his family members.

So reciprocity needs to be clearly defined, and business should be separate from personal favors in reciprocity deals.

Other problem: if the US government refuses the Algerian general's son a visa, there's always a possibility that the local Coca Cola factory could suffer a bitter consequence or two. That's why a lot of multinationals put locals in charge that is Coca Cola Algeria CEO will be an Algerian, usually a relative of some powerful general.

Bad reflexes

Sometimes governments have excellent economic organization, a very good ecosystem, but horrible reflexes.

In South Korea for example, the structure of the economy is decent, albeit some big problems in there.

But the main problem with South Korea is that the government is omnipotent, and can take a huge decision that can completely destroy the economy.

An example of this: South Korea fires its public servants massively on a regular basis (just did so again a few months ago).

Problem is: public servants and their paychecks represent around 10% of the economy. So if you fire 3% of your public servants (like South Korea often does) you're really slashing 0.3% of your economy (that's several hundred millions of dollars).

So think about the ecosystem. Public servants earn a paycheck, purchase housing, get mortgages, lease cars, get credit card debt. And when you fire them massively, that's a big hole in the economy.

South Korea also likes to change norms out of the blue! So for example, even though there's a great banking system and a high-tech economy going on around Korea, a lot of times the government is going to force factories to purchase brand new machines (often machines owned by cronies) and to throw out the old machines.

Problem is, if the machine purchase and huge investment is followed by a recession in the economy, that's several thousand factories that will have to shut down (and the CEOs get killed by loan sharks).

So if the government is allowed to have the kind of reflexes where they interfere with the smooth operation of the economy that can cause huge recessions.

Not testing economic laws

If you're going to ban smoking in pubs, you want to test the effect on the economy first. Ban smoking in a couple of pubs, see how they fare. Are more people coming to pubs so they can drink and breathe smoke-free air? Or are the patrons moving to underground pubs in friends' apartments where they can smoke.

Because that's what happened when the government banned smoking in pubs. Very few people were coming to bars for the fresh air (most heavy drinkers are also heavy smokers) and heavy smokers set up bars in their apartments (sometimes divorcing their wives just so they could turn their apartment into a pub) and invited their friends to hang out and drink canned or bottled beer (or in some cases they purchase beer kegs).

What I mean by all this is that if you're going to vote a law, any law, that has an impact on the economy, you want to test things out first and see the results.

Look at what happened in California... the local government decided to heavily tax fossil fuel energy and to encourage people to use solar and wind energy. Some governments imposed solar or wind-powered houses.

Problem is the solar and wind power plants were not getting as much energy as they expected. And now you have power shortages.

To conclude, the economy is not that complicated. You want to allow people a fair shot at making a decent profit. And allowing people to make a decent profit pre-supposes two things. One that you're comfortable with your neighbor and next kin making a decent profit (lots of jealous dictators want to be rich and the rest of the people to starve, as that gives them more control over people). And the second thing is you want to make sure the system works and enables people to make a decent profit.

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