Catch up on COVID-19 with CCIQ Chief Economist Dr Marcus Smith

I spoke yesterday afternoon with CCIQ Chief Economist Dr Marcus Smith about the latest COVID-19 news:

You can use these timestamps to find the highlights:

  • 3:00 – Marcus’s recent commentary on coronavirus impact on Qld exports (e.g. COVID-19’s billion-dollar hit to Queensland exports as volumes sink)
  • 6:10 – economic impact of social distancing measures; CCIQ members are “still in shock”; commercial rent issue yet to be formally resolved
  • 10:00 – we’ll have  a “very different commercial landscape” post-coronavirus; whether many businesses will survive is an open question
  • 11:45 – discussion of macroeconomic impacts (reference to OECD estimates, which have been nicely summarised by Brendan Coates at the Grattan Institute in his article COVID-19: New OECD estimates suggest a 22% hit to Australia’s economy)
  • 14:00 – limited scope for both fiscal and monetary stimulus measures in current crisis
  • 15:25 – discussion of federal Opposition’s concerns re. original design of JobKeeper wage subsidy
  • 18:20 – discussion of how complexity in IR system is a challenge (NB the Government, unions, and industry associations appear to be working on this issue; e.g. see Award Flexibility during coronavirus)
  • 20:30 – discussion of the need to reopen the hospitality sector as soon as we can (without damaging public health) to avoid further structural economic damage; mention of encouraging news Qld appears to be “flattening the curve”
  • 22:30 – discussion of Adam Creighton’s Australian article advocating public sector wage cuts (see my previous QEW post Paradox of Thrift in recessions and depressions)
  • 27:15 – big shout out to Queensland Health which appears to be doing a great job “flattening the curve” in Queensland

Jimmys

Pre-coronavirus social distancing measures, Jimmy’s on the Mall, Brisbane would have been heaving on a Friday afternoon. No longer.

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Paradox of Thrift in recessions and depressions

The Australian’s economics editor Adam Creighton is today advocating for public sector wage cuts by Australian governments, a policy which may be morally virtuous but would be economically damaging in this time of economic contraction, in my view (see Coronavirus pay cuts: This may make you very, very angry). Creighton writes:

Perhaps a temporary higher rate of income tax cutting [public service wages] is the cleanest solution.

During the Depression, the Scullin government cut public sector pay by 20 per cent.

Regular readers will know I’m in favour of public sector wage restraint, but what Creighton is advocating makes no sense in an economic contraction, where it would make things worse. Indeed, policies such as the Scullin government’s public sector wages cut are widely regarded by economic historians as having exacerbated the Great Depression.

In recessions and depressions, the Paradox of Thrift identified by John Maynard Keynes applies. This Paradox is generally described with reference to households but the logic applies to government spending, too. What may be beneficial for households acting alone is not beneficial for the whole economy, as the impact of everyone saving and reducing spending is to reduce output and income across the economy. It is a fallacy of composition to suppose that what is beneficial at the household level is beneficial at the economy-wide level. This is a first-year economics lesson we need to remember in this time of economic contraction.

Adam Creighton is recommending a perverse fiscal policy. Cutting public service wages during this time of contraction would reduce household incomes and aggregate spending and inflict further pain across the economy.

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The Fast Depression – 10 million newly jobless Americans in just two weeks

It is hard to overstate how rapidly economic conditions are deteriorating in economies affected by coronavirus, most particularly in the United States, which is seeing hitherto unbelievable numbers of people filing for unemployment benefits (see chart below). The 6.6 million claims last week was twice the previous record of 3.3 million, which was set the week before, and which was already an unbelievably high number, 10X the number from the week before that one. So that’s around 10 million additional Americans unemployed in two weeks, although it’s unclear how many jobs are gone for good and how many workers have just been furloughed or stood down for a temporary period, as Jason Furman has noted (Obama economist: Lessons from the 2008 crash). It’s been observed by US commentators that the increase in US unemployment over the last two weeks is broadly equivalent to the increase which took six months to occur during the Great Recession in the late 2000s.

Jobless_claims

We are seeing a rapid real-time demonstration of the Keynesian multiplier, as the initial direct shock from coronavirus ripples through the economy, with reductions in aggregate output and income leading to lower spending, leading in turn to lower output and income, further reducing spending, and so on, in a cumulative process. The huge amounts of government support being provided to both the US and Australian economies will mean they should soon find a floor and we should avert a re-run of the Great Depression, but the US unemployment rate is widely expected to now be at least 10% and will probably get even higher still before this is over. There’s little doubt we’ll end up with a 10%+ unemployment rate in Australia. Certainly, consumer confidence has plummeted (see chart below).

ANZRMCC

It looks like we may learn today just how much money the Australian Office of Financial Management (AOFM) will need to borrow each week to pay for the coronavirus rescue measures and to make up for lower revenues, based on an article (Can the bond market pass the $300b test?) in the Financial Review:

Soon, the government’s debt management agency, the Australian Office of Financial Management, will reveal just how much it intends to borrow to fund the coronavirus response. The estimate is that an additional $300 billion of bonds will have to be sold over 15 months.

That is, the AOFM will need to increase its weekly bond sales from $1.2-1.6 billion to $4-5 billion. Will this mean Australia loses its AAA credit rating? Possibly, although even with this additional debt we’ll still be in a better position than many other OECD economies. The big problem with debt is the interest bill, which, while manageable at the low interest rates we’ve seen, could become hugely problematic in future years if the AOFM ends up having to refinance large amounts of debt at higher interest rates in the future.

I chatted about how the AOFM borrows money on behalf of the Australian Government with Steve Austin on 612 ABC Brisbane on Tuesday afternoon (from 2:41:00). Incidentally, I expect the Queensland Government is also facing a huge funding challenge, and I wouldn’t be surprised if it has been lobbying the Australian Government for assistance with its borrowing program, as it did during the financial crisis, a story I tell in my 2018 book Beautiful One Day, Broke the Next.

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Coronavirus policy responses with Joe Branigan – latest Economics Explained episode

Last night I recorded an Economics Explained podcast interview with my good friend and former Treasury colleague Joe Branigan of Tulipwood Economics on the economic impact of coronavirus and the economic cost of responding to it.

Use these timestamps to help you jump to the highlights:

  • 1:50 – Joe reviews international data on coronavirus cases as at 1 April
  • 5:00 – how case fatality rates depend on the testing regime
  • 7:30 – why Italy has been so badly affected compared with Australia
  • 11:05 – what is a Disability Adjusted Life Year (DALY)?
  • 13:00 – discussion of whether cost-benefit analysis is relevant in assessing coronavirus responses
  • 20:50 – Sweden identified as a country which appears willing to tolerate a worse public health outcome to avoid enacting draconian measures
  • 23:20 – discussion of pros and cons of a full lock-down strategy, following a replay of an excerpt from my interview with Nicholas Gruen last week
  • 30:20 – “No one knows what the right answer is” – recognition we have much to learn from the variety of responses and experiences around the world
  • 32:00 – major takeaway is that each country is on its own trajectory and policy responses need to be specific to each country

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Gov’t faces huge funding challenge as it puts economy on life support

The federal government’s latest rescue measure, the JobKeeper Payment, estimated to cost $130 billion, may well be justifiable, given social distancing measures have shut down large parts of the economy for an indeterminate period, and I recognise the need to act fast, but the government needs to provide further information to assure the public it is in control of the situation. One area of concern is how the government is going to pay for all these measures and how much public debt we’ll ultimately end up with. I expect it will be challenging for the Australian Office of Financial Management (AOFM), the government’s debt management office, to fund the government’s $194 billion of rescue measures (and to make up for a huge fall in revenue) and to ensure the money is available when it is required.

Until recently, the AOFM would promptly update the market on its borrowing program following major government announcements. It is no longer doing so, as it appears it’s all too hard given the rapid pace of policy development. The AOFM last provided an Issuance Program Update on 12 March, the day of the first $17.6 billion rescue package. It hasn’t provided an update on what measures since then mean for the amount it has to borrow each week, which now must be at least $3 billion per week for the foreseeable future, rather than the $1.2 to 1.6 billion per week it contemplated on 12 March. In its weekly Forthcoming Transactions update published last Friday, the AOFM acknowledged it needs to provide further information:

The Australian Office of Financial Management (AOFM) understands the need to provide updates on its funding program and will do this to the best of its ability. Further details on projected issuance rates and related operations will be released in the coming week.

In other words, the AOFM is scrambling to figure out how it’s going to fund the government’s commitments and the revenue shortfall. Let’s hope the AOFM does release those further details on projected issuance (i.e. bond sales / borrowing) this week. We need to have confidence the Government can borrow the money it needs to fund its commitments as they fall due.

In the worst case, the government could always ignore the RBA’s independence and instruct it to monetise the deficit, with all the long-term risks that involves. In the last two weeks, hitherto unthinkable policy measures have been introduced, so we probably shouldn’t be surprised if we ultimately end up with an experiment in so-called Modern Monetary Theory. As the PM said the other day, we are in “uncharted territory.”

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Businesses in “survival mode” says CCIQ Chief Economist Dr Marcus Smith

THis afternoon, I caught up via Zoom with CCIQ Chief Economist Dr Marcus Smith to discuss the extraordinary coronavirus-related developments since we last spoke on Sunday. As Marcus notes early in our conversation, which you can listen to below, things are now “absolutely disastrous.”

Use these timestamps to help you find the highlights:

  • 1:30 – reference to 3M+ unemployment claims in one week in US and discussion of how bad things could get Australia
  • 2:10 – Queensland “business owners are in tears” and are contacting CCIQ to help them figure out what assistance is available from government
  • 8:00 – “it’s going to be a bloodbath” across Qld’s small businesses
  • 9:00 – overview of recent Qld Gov’t $4 billion rescue package
  • 12:30 – CCIQ working closely with other industry associations (e.g. Property Council) and state and federal governments on additional assistance measures – lobbying for rental relief and wage subsidy
  • 16:45 – small businesses are “shocked” and are in “survival mode”
  • 18:30 – problem with jobseeker payment for sole traders as it’s means tested
  •  21:30 – discussion of how long it could take the economy to recover once we get to the other side

As I’m preparing this post, I’m listening to Steve Austin on 612 ABC Brisbane, and I am in full agreement with various interviewees expressing the strong view people should stay away from tomorrow’s local government elections.

Social_distancing

Well done Woolworths MacArthur Central for enforcing social distancing

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COVID-19 response with Nicholas Gruen – latest Economics Explained episode

Despite all the draconian measures already imposed by Australian governments, ABC health expert Dr Norman Swan thinks we still need to do more. Just after I woke up this morning, I heard him on ABC Breakfast suggesting an even wider shutdown: “If we want to get back to some semblance of normal life and economy, it’s got to be short, sharp, and today.” This is a view increasingly being shared by many Australians. In an excellent article PANIC IS OUR FRIEND! published earlier this week on Club Troppo, Nicholas Gruen argued:

The government didn’t take coronavirus seriously at first. As it’s amped up the seriousness of its response, it’s done so reluctantly and now it’s in no man’s land, with strong social-distancing measures that will cost the economy a bomb. But those measures are not strong enough to rid the country of the virus. So they’re with us until we gain herd immunity, which will take the best part of the year.

We’ve picked a scenario that is the second-worst for health (the worst being doing nothing) but it seems to me to be the worst possible option for the economy.

I spoke with Nicholas about his views on the coronavirus response in my latest Economics Explained episode.

Use these (approximate) timestamps to jump right to the highlights:

  • 4:00 – Nicholas discusses his recent article on coronavirus policy PANIC IS OUR FRIEND! which argues in favour of strong, early action on coronavirus, rather than the incremental ramping up of restrictions we have seen
  • 7:50 – Nicholas notes these decisions are challenging because panic itself has costs, as argued by Paul Frijters in his article The Corona Dilemma
  • 12:30 – discussion of John Quiggin’s Option value post on the benefits of early action
  • 14:05 – Nicholas suggests policy makers should follow Google’s example and experiment and AB test policy responses, generating feedback to improve policies
  • 15:05 – discussion of what Ben Shapiro calls The Un-askable Question
  • 26:35 – Nicholas observes “when things change they become highly unpredictable” in our discussion of what coronavirus could mean for our future economic system
  • 36:00 – conclusion of discussion with a quote from Nicholas’s article: “Right now, panic is the friend of anyone who doesn’t want to get this disease, which continues to surprise on the downside (i.e. the bad side).”

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