The Problem is Entropy, Not Economics

The language of economics is not being particularly helpful during the pandemic and its early aftermath. Describing what occurred in 2020 as a 'recession' was fundamentally misleading, since a government-mandated and paid-for cessation of economic activity need share neither the causes or the results of a recession. Worse, if you commit to the notion of a 'recession', you'll find yourself also talking about 'recoveries' and 'rebounds'. That will smoothly lead you into concentrating on how patterns of spending and saving are evolving.

Whilst disruptions of saving and spending may be visible, they are nowhere the main driver of developed countries' current woes. Where they occur, they are the effects, rather than the cause of underlying problem.

We would be better to think in terms of thermodynamics, and specifically entropy. Any reasonably-sized economy can be thought of as a massive interlocking system of commercial and financial relationships, built up with enormous effort, trial and error, over time. The bigger the economy, the more complicated the system. A global economy, par excellence, is an almost incomprehensibly intricate achievement, something which has taken decades to evolve into its immediate pre-pandemic state. No government could design it.

But governments have a much easier time breaking it - entropy alone is a most powerful ally. Left alone, entropy ensures that systems want to collapse. Thus, governments found they could fairly easily (if expensively) command that large parts of the global economy shut down during the pandemic. Unfortunately, breaking the machine is far harder than restoring it. When you try to 're-open' the global economy, entropy will have determined that various bits no longer work, various components have gone missing.

Analogies are dangerous, but here goes: if you take a hammer to stop an engine, putting more fuel in the tank isn't going to ensure that when you need it, it restarts. Similarly, massive continued fiscal and monetary stimulus isn't the key to 'restarting' the economy.

Entropy is visible in the global rash of shortages and dropped connections, failed or absent relationships which we gloss as 'supply problems'.

Naturally, they are worse where, for various reasons, governments were already committed to changing and/or dismantling various sub-systems of the entire global system before covid hit. In Britain, that means Brexit. In the US it means political turmoil and social breakdown. In most developed economies, it means attempting to de-carbonize. And practically everywhere, it means direct attempts to scale back globalization, either by raising barriers to finance in the name of 'anti-money laundering', or by direct pressure on trade (by the relentless rise in Non-Tariff Barriers, and lately, pressuring China's industrial economy).

The system will eventually heal itself, with prices providing the information the system needs to self-organize. I don't know how long that self-reorganization will take: much depends on whether governments allow price mechanisms to work their unpopular magic. Governments determined to 'build back better', though well-intentioned, are more likely to delay than accelerate the process. Why? Because this was never a recession, and this is not a recovery.