Tuesday, March 24, 2020

Coronavirus economy: Reports of an economic crash have been greatly exaggerated

The economy today lives in suspense, not free-fall. The pandemic will pass. Supply chains will refill. Securities markets will recover, and growth will continue.

Vernon L. Smith.
"While on spring break from Chapman University, I am now “confined” by the pandemic to my home in Tucson where I live part of the year. The fourth of four COVID-19 cases in Pima County (population just over one million) was announced as I write this — a haven of safety indeed. But street traffic is heavy, the stores crowded, and people are busily surfing the empty shelves and buying from the shelves not yet empty.

Americans are selling securities and buying toilet paper as Donald Trump urges us all to socially distance ourselves at least six feet from each other and limit gatherings to no more than 10. Local stores have announced that oldsters like me will be allowed to shop their empty shelves for one hour before regular opening time.

There is a deep economic lesson hidden in this rush to stock up on ordinary consumer goods, coordinated spontaneously by common fears of supply shortages and stock-outs.

Prices guide economy

Why, throughout almost all our life of economic experiences, do none of us have the slightest concern that when we go to our local stores, everything we might desire will be waiting for us on the shelves? We never think on these things because we have no need or motivation to think on them. We operate deeply immersed in a world of prices and available goods and services, and never give it a thought. No central office, or person, or bureau is in charge. Yet vast supply chains encircling the globe and, coordinated by people governed by prices assure that your green tea, buttermilk, canned tuna and toilet paper will be waiting silently for you whenever you might decide to shop. Each of us oversees a fragment of this whole, and that is quite enough.

Welcome to the miracle of consumer markets, requiring only that sellers not falsely represent or advertise their products and that you must pay for anything you buy. Consequently, prices constantly adapt and change in response to events near and far that cause pork prices to fall, or poultry prices to rise. When your government thought it could improve air quality by mandating that ethanol be added to gasoline, you didn’t even notice that the price of tortillas increased, here and in Mexico.

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