New COVID-19 chat with Joe Branigan of Tulipwood Economics

Posted on March 22, 2020 by

I’ve recorded another interview on the latest COVID-19 rescue package from the federal government, this time with my good friend and former Treasury colleague Joe Branigan, Director of Tulipwood Economics. Joe provides important context for the massive rescue package. He suggests the designers of the package were implicitly assuming that, without it, Australia would experience an economic depression, not just an ordinary recession. You can listen to our conversation here:

You can use these timestamps (approximate) to find some of the highlights:

  • 4:45 – Joe thinks the size of the rescue package “looks about right”
  • 6:00 – Joe discusses the massive size of the fiscal impact of the rescue package – up to 5% of June quarter GDP and 7% of September quarter GDP – and suggests these are measures designed to avert a depression
  • 9:25 – discussion of super-sized income support for job seekers (and sole traders) and how the normal rules of public policy have (understandably) “gone out the window” in this time of crisis
  • 18:40 – Joe agrees with the PM in rejecting the suggestion from Grattan Institute CEO John Daley that we should have an almost complete shutdown of the economy for a short period to stop the spread of the virus
  • 22:40 – discussion of how Qld schools will probably shut this Tuesday (except for children of health/other key workers), but how schools may need another week to prepare for online learning in term 2
  • 28:15 – discussion of the need for Churchill-style political leadership in this time of crisis
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COVID-19 rescue package chat with CCIQ Chief Economist Marcus Smith

Posted on March 22, 2020 by

In both its scale and scope, the COVID-19 rescue package announced by the Prime Minister and Treasurer this morning is stunning. I spoke with CCIQ Chief Economist Marcus Smith earlier this afternoon regarding what he thinks about the package, and you can listen to our conversation here:

Use these timestamps (approx.) to jump to the highlights:

  • 1:25 – Marcus says it’s an “absolutely unprecedented” rescue package
  • 3:30 – “Things are getting really tough” in the Qld economy
  • 5:00 – I ask Marcus whether the unemployment rate could get up to 10%+
  • 7:30 – I mention the Australian Office of Financial Management (AOFM) will need to massively increase its borrowing program and ask whether the rescue package could be “over the top”?
  • 9:30 – discussion about allowing early access to superannuation (note audio a bit distorted in places but improves after Marcus switches to his landline)
  • 14:00 – Marcus is happy with the general composition of the package
  • 15:00 – “We know [coronavirus impact] is going to be bad…and it will have a lingering effect”
  • 16:55 – I ask Marcus what else the state government needs to do and he notes CCIQ wants additional payroll tax relief, as current deferral is just “kicking the can down the road”
  • 17:45 – Marcus notes Qld Government has so far only announced a “relatively small spend” compared with other state governments
  • 21:20 – what’s happening in the Qld regions
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COVID-19, machine trading & financial markets with Michael Knox – Economics Explained EP27

Posted on March 19, 2020 by

Why are financial markets swinging so wildly in response to the novel coronavirus, COVID-19? Yesterday I spoke with Michael Knox, Chief Economist of Morgans, who thinks it’s related to the machine trading programs which dominate financial markets. Today, I’ve published our conversation as the latest Economics Explained episode COVID-19, machine trading & financial markets with Michael Knox.

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

  • 0:00 – discussion begins with me referring to Michael’s recent podcast/article The revenge of the machines which begins “The market is being sold down by machine trading programs focused on momentum.”
  • 4:00 – Michael says recent market gyrations have “nothing to do with fundamentals….we’re in a situation because of the epidemic, because of the emergency that only happened once every hundred years or every 50 years – you can’t build a model of something like that. So inherently, what those trading models are acting on is the momentum signal…”
  • 7:00 – beginning of discussion on market liquidity
  • 11:00 – Michael discusses the relationships between liquidity, price discovery, and market volatility
  • 15:10 – Michael notes re. COVID-19, “On this occasion, you had a change, which was caused by a once in 50 years shock or once in 100 years shock. The market doesn’t have that kind of memory of data to be able to price that in.”
  • 16:15 – discussion of valuation of shares/stocks
  • 18:15 – what is momentum?
  • 24:20 – discussion of fair value of Australian sharemarket and Australian economic outlook

Nothing in this podcast should be considered financial advice, and it contains general information only.

Economics Explained Logo

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COVID-19 update – UBI and “un-Australian” grocery stockpiling

Posted on March 18, 2020 by

US progressive pundits such as Ana Kasparian and Kim Iversen are stunned the Trump administration is considering a temporary Universal Basic Income (UBI) as a response to the COVID-19 crisis (e.g. check out Ana REACTS to Trump giving Universal Basic Income and Trump adopts Andrew Yang’s UBI???) The idea of a $1,000 cheque to every American adult (with the exception of those earning $1M+) has been floated, an idea partly inspired by failed Democratic Presidential candidate Andrew Yang who proposed a $1,000/month UBI, as I told 612 ABC Brisbane’s Kat Feeney yesterday (COVID-19 and UBI chat with Katherine Feeney).

I don’t think a temporary UBI would be sensible in Australia. There won’t be a need to provide income support for every adult in Australia, as large numbers of Australians shouldn’t end up infected, or will suffer only mild symptoms, and many of the infected will be able to rely on paid leave, savings, or existing welfare payments. A UBI wouldn’t be well-targeted and would add unnecessarily to Australia’s growing debt burden. Instead, we should look at how we can make the existing social security system (i.e. Newstart, Sickeness Allowance, etc.) easier and quicker for people to access in this time of great need.

The federal government may also need to consider a new temporary social security payment to partially replace earnings of casual workers who find they are unable to work because the café, bar, or restaurant they work at isn’t allowed to open, as suggested by ANU Professor Peter Whiteford to ABC News today. The federal government may be thinking of something along these lines as it formulates its “huge” new rescue package (see Scott Morrison to unveil huge package of fiscal and monetary measures Australian article).

In other COVID-19 news, the Prime Minister, in his press conference this morning, criticised stockpiling of grocery items as “un-Australian”, one of the strongest rebukes you can hear in this country. My good friend and former Treasury colleague Joe Branigan of Tulipwood Economics made a great observation regarding supermarket shortages (e.g. of toilet paper) in a discussion we had following the PM’s press conference. He suggested that if Coles and Woolies were “allowed” (i.e. if it wasn’t considered “un-Australian”) to increase the price of toilet paper packs by $2-$3 dollars, with exceptions for the elderly or social security recipients on equity grounds, that could be enough to balance supply and demand in the short-run and prevent the excessive hoarding of toilet paper. So Uber-style surge pricing for toilet paper and other heavily-demanded grocery items in the coronavirus panic could be a possible solution, although a very unpopular one, and one that could itself be labelled “un-Australian”. An article which makes a similar point to Joe’s, but in the US context, has been written by Sandra Klein and published on the Mises Institute website:

Anti-gouging laws are the reasons there is a toilet paper shortage

Finally, it’s remarkable how a crisis forces people to reassess strongly held positions. Some conservative national governments are undertaking large-scale industry bailouts and social assistance measures which could result in a permanent expansion of the size of government. And Queensland’s centre-left, interventionist state government is having to unwind regulations affecting trading hours and the times at which supermarkets are allowed to re-stock, to ensure people can get the groceries they need. Will there be convergence to a Scandinavian-style strong welfare state with flexible markets across the OECD? Time will tell but, for the time being, as was the case during the 2008 financial crisis, everyone is looking to government for help.

shelves

These shelves were once stocked full of toilet rolls. Are we living in Australia or the former Soviet Union?

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COVID-19 & UBI chat on ABC Brisbane radio with Katherine Feeney

Posted on March 17, 2020 by

I had an interesting conversation this afternoon with 612 ABC Brisbane’s Katherine Feeney about coronavirus and whether Universal Basic Income (UBI) might help people get through coronavirus-induced financial difficulties (from 1.55:20):

612 ABC Brisbane Afternoons with Katherine Feeney, 17 March 2020

Note that this audio recording disappears from the ABC’s website after one week.

In my view, instead of UBI, I’d rather see consideration of temporary relaxation of requirements for existing social security benefits such as Newstart and Sickness Allowance to ensure that people who need assistance during the coronavirus outbreak can access support without the usual waiting periods and other conditions (e.g. the need to demonstrate you’re actively seeking work). Realistically, we need to work with the existing welfare system, with some temporary modifications, to help us get through this, and a UBI scheme wouldn’t be feasible in my view.

Certainly, if we permanently implemented a UBI it would come at a high cost and we’d need to sharply increase marginal income tax rates. Check out this Parliamentary Library paper on UBI and this YouTube video on UBI pros and cons which I found informative. You might also be interested in my Economics Explained interview with Andrew Leigh MP, in which we discuss UBI among other topics. Andrew is not a fan of UBI, primarily because he thinks work helps provide meaning in our lives.

In my conversation with Katherine, I did something I’ve been doing a lot lately and quoted Austan Goolsbee, who was once Chair of President Obama’s Council of Economic Advisers, on the economic response to coronavirus: “the best thing you can do for the economy has nothing to do with the economy.” It’s good that governments all over Australia are considering what they can do to temporarily support the economy, but what is really critical for the economy, and for public health, is to contain the spread of the virus, as I first noted in a recent post.

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COVID-19 conversation with Joe Branigan of Tulipwood Economics

Posted on March 16, 2020 by

In the last few hours, I’ve recorded a discussion with my good friend and former Australian Treasury colleague Joe Branigan, Director of Tulipwood Economics, on the novel coronavirus, COVID-19. We chatted about the potential economic impact of coronavirus, which is very large, and public health and economic responses to it, including the controversial issue of whether to preemptively shut down schools.

Here are some timestamps so you can jump to some of the highlights:

  • 1:35: coronavirus impacts on Qld and Australian economies
  • 3:20: June quarter will be “very difficult” for the Australian economy
  • 6:40: Joe explains we could expect a 1% GDP contraction in June quarter (based on current information) but it could be more
  • 9:30: Joe discusses Australian Government’s $17.6 billion stimulus package
  • 13:00: Joe gives stimulus package a “B” compared with “D” for 2008-09 stimulus packages
  • 15:00: reflections on Treasury’s role in developing stimulus packages, with reference to current Treasury Secretary Steve Kennedy and former Secretaries Ken Henry and Martin Parkinson
  • 18:05: discussion about new National Cabinet
  • 23:00: Joe on pros and cons of school closures
  • 29:25: what will Australia look like after we get through this?

And here are some charts Joe prepared to illustrate the point he made about Australia’s fiscal consolidation having given us room to respond with fiscal stimulus.

JB chart 1

JB chart 2

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Best coronavirus response advice offered by Austan Goolsbee & Dr Norman Swan

Posted on March 15, 2020 by

The best economic advice I’ve heard during the coronavirus threat is that offered by Austan Goolsbee, former Council of Economic Advisers Chair under President Obama. In a recent NPR Planet Money podcast Medicine for the Economy, which is compulsory listening, Goolsbee said:

…the best thing you can do for the economy has nothing to do with the economy…

…we have to get on top of this as a public health matter, I think, before you can effectively deal with this as an economic matter.*

This is very true. The biggest threat to the economy is the virus getting out of control and shutting down activity for months. As emphasised in the Planet Money episode, coronavirus is a supply-side shock as much as a demand-side shock. The government’s stimulus is aimed at stimulating demand, but we may end up in a situation where people can’t go to work, won’t go out to spend, and many shops and venues won’t be open. The stimulus won’t be much help in that case.

The best thing we can do now for the economy—and more importantly for public health—is to rapidly contain the virus. It’s becoming clear we should consider even more drastic short-term measures than the Prime Minister has recently announced. Yes, such measures would come at a substantial cost, but they could help us avoid even higher costs later on, if large parts of the economy shut down for months, and tourism-dependent regions such as the Gold Coast and Cairns experience mini-depressions. More drastic measures in the short-term may also help us avoid the horrifying possibility of hospitals being unable to cope with massive demands for treatment.

The best public health advice I’ve heard regarding how Australia should deal with coronavirus has come from the ABC’s Dr Norman Swan:

Dr Norman Swan recommends proactive national lockdown

The blurb accompanying the clip on YouTube summarises his advice:

The ABC’s Dr Norman Swan says a ‘severe shutdown’ is required to combat coronavirus…

…a proactive quarantine, including closing schools, while case numbers are low to curb the spread of the virus.

I agree with Dr Swan. We need to contain this virus quickly to save lives and to avoid even greater economic disruption in the future.

*A transcript of Goolsbee’s remarks is available.

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