After Promoting Lockdowns, UN Advocates Inflationary Policies

(Peter C. Earle,  American Institute for Economic Research) Last week the United Nations Conference on Trade and Development (UNCTAD) issued a report entitled “Development Prospects in a Fractured World.” In it, the authors caution that:

[s]upply-side shocks, waning consumer and investor confidence, and the war in Ukraine have provoked a global slowdown and triggered inflationary pressures. All regions will be affected, but alarm bells are ringing most for developed countries, many which are edging closer to debt default.

It is certainly true that emerging market nations are seeing their debt-service costs increase. The report cites some “60 percent of low income countries and 30 percent of emerging market economies in or near debt distress.”

But the blame should not be put on spendthrift government practices. Rather:

[i]nterest rate hikes by advanced economies are hitting the most vulnerable hardest. Some 90 developing countries have seen their currencies weaken against the dollar this year – over a third of them by more than 10 percent. 

And for this reason, UNCTAD advocates that international financial institutions “provide increased liquidity and extend real debt relief for developing countries.” And additionally that governments “increase public spending,” “use strategic price controls to directly target energy, food and other vital areas,” and “channel more money into renewable energy research and development.” 

Before tackling the smorgasbord of economic ignorance here, it is helpful to look back to almost exactly two years ago when Lockdowns have Killed What’s Left of the United Nations’ Credibility was published. As noted, early in the pandemic the United Nations Office of the Secretary General called upon member governments to “step up and do everything possible to contain the disease,” adding that “[w]e know that containment is possible, but the opportunity is narrowing.”

Thus the false dichotomy almost universally applied in the developed world in March and April of 2020 (that a choice must be made between economic viability and public health) was invoked. But many of the nations to which the UN was communicating are underdeveloped, thus not having the considerable “laptop class” that could easily shift to work from home. In May 2020, in the face of growing food security concerns among impoverished nations, the United Nations Human Rights Commissioner nevertheless urged that lockdowns not be lifted for political or economic considerations. 

If at any time in the last few decades there was a clear role for the United Nations to play in defending the most economically vulnerable nations on Earth, this was it. The multinational organization might have recommended that member states address the spread of COVID by pursuing a balance between economic vitality and disease mitigation, informed by local knowledge and conditions. It might have promoted the idea of shift work or building risk-stratified workforces in agriculturally dependent nations. Yet, it parroted the policy prescription employed by many wealthy developed countries (and even then not without consequences).

Nevertheless, the United Nations is doubling down by promoting policies which are guaranteed to worsen the lot of individuals in both developed and developing worlds alike. A few points: 

The link UNCTAD is attempting to draw between contractionary monetary policy and the current economic slowdown is questionable at best. US GDP was in decline (-1.6 percent) in the first quarter of 2022 before the first of the Fed’s rate hikes. Given lag times, it is unlikely that the second quarter GDP contraction (-0.6 percent) was significantly driven by the rate hikes during that quarter.

Prices have been rising since early 2021. UNCTAD seems to be conflating the global economic decline resulting from inflation, supply chain, and employment disruptions with the policy rate increases intended to blunt them. In doing so they are effectively calling for stagflation (slowing growth with high inflation) in place of a recession (slowing growth). 

There are few better litmus tests for economic ignorance than endorsing price controls, and the UNCTAD report proposes them explicitly. When prices of sought-after goods and services are capped, critical price signals indicating scarcity are eliminated which thwarts the effective functioning of markets. By recommending price controls with the qualifier “strategic,” they are likely suggesting that only a handful of items should be capped.

But even price controls on a small number of sought-after items, such as gasoline and eggs, will inevitably result in shortages and, over time, distortions in the prices of other goods as money is redirected. Indeed, most price-control campaigns have historically started by targeting a small number of essential goods initially, only to expand to others as scarcity broadens and price distortions spread. Other effects associated with price controls are decreasing production quality of goods, as well as corruption.

It is difficult to determine whether the UNCTAD recommendation that countries increase public spending is made in jest or not. The lockdowns which most governments embraced, and which the United Nations supported, were major factors abetting and undergirding the massively expansionary fiscal and monetary policies put in place throughout 2020 and early 2021.

Intentional policies, not a virus, shut down most of the nations of the world for weeks or months two years ago. It is from those policies that the current inflation, supply chain problems, and other current economic problems emerged.