What does a global pandemic do to the economy?
Richard Denniss explains why the government is shutting down whole sections of the economy and unpacks the government’s economic survival package.
In a few short weeks, the government has gone from hardly being able to say the words ‘economic stimulus’ and promising a surplus in the May budget, to an Australian economy that’s going into recession and requires enormous fiscal measures in response as hundreds of thousands of people lose their jobs.
It’s an uncertain and scary time for many, so we got Australia Institute chief economist, Richard Denniss, to explain this all in plain English, on the latest episode of Follow The Money.
How big is the economic impact of coronavirus going to be?
At the moment the government is — rightly and deliberately — shutting down enormous parts of our economy. The government has shut down most of our travel industry, nearly all of our tourism industry, and we’re seeing retail and cafes shut down as we try to respond to this global health crisis.
We’ve never been through a period where government policy has been used to shut down so many parts of the economy all at the same time for what’s likely to be quite a long time.
This will likely be the most enormous shock to the Australian economy seen since World War II and arguably, it’s a bigger economic shock than that. War creates huge government demand for people and for production. But what we’re seeing in Australia right now is the complete opposite.
We’ve just, out of necessity, wiped out the entire tourism industry which employs around 650,000 people. Six. Hundred. And. Fifty. Thousand. People. We’ve heard for years that mining coal is the backbone of the Australian economy. Well, there’s only 50,000 work in coal mining.
And there are millions of people — literally millions of people — that work in restaurants, cafes, and retail, who will be affected.
Just how different is this going to be from a regular recession?
Enormous parts of our economic activity are being deliberately crushed. No one knows how long we’ll have to keep them suppressed — because we don’t know how long the coronavirus epidemic will last — and no one knows how quickly we’ll be able to try and resuscitate the economy, once we’ve finished crushing it.
To say this is unprecedented is is an understatement. It’s like saying getting hit by meteor is unprecedented.
Recessions usually last one or two financial quarters. This is not a cyclical downturn, and it may last far longer than just one or two quarters. If we’re very lucky, the government will be suppressing economic activity for only two or three quarters, but it could be more. Remember, we’ve never tried this before.
It’s always hard for economies to come out of recession, but the longer they’ve been in them, typically, the slower they are to come out of it.
A lot of people have seen their income dry up instantly
Those people need money in the bank now, this week, to buy groceries and pay rent. ‘Go early, go hard, go households’ is not a bad rule-of-thumb for designing the early stages of any stimulus. There’s no point announcing these things rapidly and then dribbling the money out slowly.
The last thing people who’ve lost their jobs need to worry about is is managing cash flow for the next couple of weeks while the while the government sits on the money.
So at a human level, it’s cruel and at an economic economy-wide level, it’s ineffective, that that money needs to hit people’s accounts fast.
The government has to abandon the idea that they’re responding to a short term cyclical downturn and abandon the rhetoric that their response needs to be “temporary and targeted”.
This is a problem, the likes of which we’ve never seen. The economic problem that we’re talking about is, rightly, being caused by the government itself. It’s the government that’s crushing economic activity in big and important sectors of our economy. So the government has to step in and create as many jobs and as much economic activity as it can — hopefully almost as much as it crushes out of those other sectors. The government needs to create those new jobs in other sectors as quickly as possible, they can create demand for that work overnight.
The government should be literally employing tens of thousands of people to go and work on small community projects that need doing, now. All these schools that are shut down can do with a coat of paint and some new carpet.
There’s public buildings, there’s public toilets, there’s community buildings, there’s town halls. All of these things could do with some maintenance that’s probably been put off.
The federal governments and the state governments need to step in right now and bring forward the next five years of scheduled maintenance and do everything they can to create — literally create jobs for people who would otherwise lay idle.
We could come out of this with some tangible benefits — if we do it right
Australia’s coast is full of beautiful art deco ocean baths. The reason they are art deco is that in the middle of the Great Depression, state governments and local governments went and built beautiful pieces of public infrastructure to stimulate the economy and create jobs — providing benefits nearly a century later.
Nearly a hundred years ago, we knew exactly what to do in times like these. And yes, there is an enormous opportunity for the government here, too.
Not just to create meaningful work, and the income that people need to get through this crisis, but the government can literally create assets that will last not just for decades, but for a century or more.
The capacity to do that is sitting right in front of us.
The idea is nearly 100 years old. We know what to do.
But, if all we do is cut taxes and post out cheques to people, while that’s better than doing nothing it’s not nearly as good as spending money creating jobs in the short term that give us solar panels, public buildings and indeed beautiful pieces of infrastructure that can last for decades to come. We know what to do. We just have to choose to do it.
We were poorly set up to meet a crisis of this magnitude
The best thing to do for a crisis is to prepare and neoliberalism has trained us to do the opposite of that. Sadly, people have been queuing in Centrelink offices for years and spending hours trying to get through to operators.
Centrelink, unfortunately, has provided terrible service to our most vulnerable people for years. Now, middle class people are discovering just how cruel but how inefficient that is.
Similarly, our hospitals are stripped down to bare-bones capacity. We just haven’t increased things like intensive care beds nearly as fast as our population has grown. And every winter, our hospitals come under enormous strain.
The idea that the less money we spend, somehow, the more efficient we are. That idea hasn’t just permeated our health sector and our welfare sector, but so much of our preparedness.
Unfortunately, neoliberalism has made us vulnerable and weak.
And that’s going to in part determine how bad the economic symptoms of this disease will be. And sadly, the worst evidence for that is the United States, which has the most privatized health system in the developed world, and a terrible welfare safety net, terrible conditions for its casual workforce and its workforce more generally.
But actually, health services, welfare services, transport services and emergency services are not a safety net. They’re the heart, not just a country and a culture, they’re the heart of the economy. As we’re sadly about to discover.