The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Attractive Hazard

08/21/2020

If you build a swimming pool without a fence and a child drowns in it, you are guilty of creating an attractive hazard.  Did you really expect a child NOT to jump into the pool?

If you require college students to return to campus during the Covid-era, knowing there are bars and party venues near campus, are you not guilty of creating attractive hazard?  Did you really expect students NOT to drink and party?  Did you?

Economists worry about the “allocation of resources.”  If we set aside all land for amusement parks, just for example, and none for housing or factories, that is a miss-allocation of resources.  If you invest everything in bitcoin and nothing else, that is a miss-allocation of resources.

Just like kids can be tempted to do stupid things like jumping into a pool or attending a Covid-party, economic resources can be tempted into a miss-allocation.

While America clearly fumbled its response to the coronavirus, our government did not fumble its response to the “flash depression” that resulted from the virus.  Kudos to Congress, who  quickly gave fiscal assistance – 12.3% of GDP, compared to Germany’s 9.4% and only about 3% for France, Spain, and Italy.  The Fed also did great with monetary assistance at 8.46% of GDP, compared to 3.5% in England, 1.7% in the eurozone and a puny 0.9% in Japan.

The bad news is that the Fed drove borrowing costs down even more and flooded the economy with liquidity.  I’m worried that interest rates have been so low for so long that resources are becoming miss-allocated.  If you can borrow money essentially for free, it tempts companies to buy back your own shares or tempts them to buy other companies or properties or tempts them to crush competitors.  Did you really expect businesses to ignore “free” money?  Huh?

The homeowner can just build a fence around the pool.  The college president can send the students home or “police” local bars.  But, only the Fed can solve the problem of excess liquidity, and they cannot do it without serious damage to the economy.  I don’t envy them . . . be patient.

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