In times of war, parts of the every-day rulebook for liberal democracies must be suspended.
To protect personal and economic freedoms, in wartime governments must temporarily curb some of them. Citizens no longer choose where to congregate or where to carry out their work. Businesses face constraints on when – and sometimes what – they can produce. Both the population and the economy are asked to support the war effort.
Be under no illusion, we are now at war – even though the enemy may be invisible. Microscopically small and essentially lifeless, in just a few weeks the novel coronavirus SARS-CoV-2 has brought Italy’s public health system to its knees. It threatens to do the same in countries across the globe. Unchecked it could kill millions. Should politicians fail to get their public policy responses right, entire governments – even presidents – will be among the casualties.
New Zealand cannot expect to escape. We may only be at level 2 on the Government’s helpful alert system, but it would be a bold call to predict we will not be at level 4 within a fortnight. The onward march of the virus into communities around the world has been remarkably similar.
The Government’s first responsibility must be to protect the public by boosting the health system and containing the virus. Taiwan, China and South Korea have shown that once the virus is established within a community, it can be contained. Comparatively low death rates from the virus in Singapore also suggests a public health sector’s preparedness has a profound impact on whether the infected live or die.
But beyond the immense health challenges, the economic fallout from this coronavirus may be even more profound. Already we can see the New Zealand economy getting dangerously sick. No one can doubt we are already in recession. The tourism, hospitality and tertiary education sectors have been decimated. Others will follow. As they do, we will see a downward economic spiral of business failures and redundancies that will make the global financial crisis mild by comparison. GDP could fall by a tenth or even more.
Unlike ‘normal’ recessions, the economic retrenchment triggered by the coronavirus is not due to bad business decisions. The fault is not poor lending or exuberant investment. Just as our senior citizens have done nothing wrong yet are being told to stay in their rooms, in this economic crisis business is blameless. Rather, both demand and supply have collapsed because the Government has taken critical action to stop the pandemic’s spread.
An even more important difference is this pandemic recession cannot be cured by conventional monetary or fiscal policy. Or at least, not at this stage. Neither the Reserve Bank nor the Government can stimulate demand when people are being told to stay indoors.
But there is still much the government can do to mitigate the effects of the corona-recession. Indeed, government intervention on a scale not seen in our lifetimes is needed. Pandemic economics calls for its own rulebook. Just as we socialise the costs of unemployment, education, healthcare and sickness, during this war on the coronavirus we must socialise the losses to the economy.
In a nutshell, the Government must protect both households and firms. It must underwrite the economy so that workers are protected from redundancy and businesses are preserved during the period of lockdown so that they can emerge once the virus is defeated to kickstart the economy. Aside from containing the virus, nothing is more critical to the future of work and wellbeing.
How might the Government do this? A picture of what is needed is emerging from countries where the coronavirus battlefront is more advanced – from the United States, Britain and elsewhere in Europe. The government needs to target both households and firms. And, as The Economist reports, it needs to do so in a way that is efficient, fast and flexible, so that it can be dialled down once the virus retreats, and up if it resurges.
To protect households, the Government must ramp up its existing wage subsidy. Last week’s announcement from Minister of Finance Grant Robertson was a good start. But much more is needed. In Britain and elsewhere in Europe governments are implementing wage subsidies of as much as 60-80% of median wages for employees unable to work due to the virus. Similar subsidies are being fashioned for the self-employed.
Subsidising the economy’s workforce may not be enough to keep businesses afloat. To survive businesses also need access to credit. The Government must use its balance sheet to provide this. At the same time, banks and other financiers should be freed from unnecessary regulatory constraints to permit them to continue to advance credit. And boards of directors should be encouraged to keep accessing it.
Ensuring the availability of credit will require a mix of public and private risk-sharing. The Companies Act must also be changed to relieve directors from personal liability for trading while insolvent (provided they were solvent before the coronavirus crisis).
The Government also has options for providing firms with tax relief. At the very least, it must ensure that provisional tax payments are not calculated on last year’s, pre-coronavirus incomes. Urgent amendments suspending the provisions of the Commerce Act to allow businesses to coordinate coronavirus-related assistance to customers are also needed.
To fund the cost of this economy-wide support package the Government will need to borrow – and to borrow big. Bond markets should be looked to first. But if necessary, the government should simply issue bonds to the Reserve Bank to meet the costs of the support package and the Reserve Bank should print money to pay for them.
Drastic measures like these will help prevent a wholesale destruction of New Zealand’s economic base. And they offer the best chance of ensuring this unprecedented recession does not turn into a second Great Depression.
The cost will be eye-watering. But exceptional times call for exceptional measures. Peace-time rules about Government spending, deficits and public debt levels should be side-lined. We are at war. Pandemic economics calls for a new playbook.