Thatcherism: our conservatives prefer punishment to 'reform'

If your citizen-strength bulldust detector isn’t pinging like blazes, you need a new one. And if Scott Morrison and Josh Frydenberg have a fraction of the courage of Margaret Thatcher and Ronald Reagan, I’ll eat the hat I’m not yet bald enough to need.

Speaking from experience, Frydenberg is like the fat man whose eyes are bigger than his belly and orders more than he can eat. He wanted to give his hardline Liberal backbenchers a thrill by invoking the holy names, but he and his boss don’t have the appetite for tough “reforms”.

The truth is that only conservatives of a certain age (and failing memories) hanker after the glory days of Thatcher and Reagan. No one else wants to return to the halcyon era of privatisation and deregulation because by now most people realise how lacking in halcyonicity those things are.

In any case, all the obvious reforms have already been made. When you’ve privatised Telstra, Qantas, the Commonwealth Bank, the Commonwealth Serum Laboratories and much else, what’s left? Selling off Australia Post?

The further you go down that road, the more dubious and distasteful your sell-offs become. The more recent privatisation of Medibank has effectively opened private health insurance provision to profit-seeking companies, adding a further problem to all that sector’s other life-threatening ailments.

The states’ privatisation of the electricity industry has turned five state monopolies into three big money-hungry oligopolists and raised electricity prices far higher than a carbon tax ever could.

The admission of for-profit businesses to childcare and aged care has hardly been a roaring success (on the latter, just ask Victorians). Bringing private companies into vocational training has turned technical education into a disaster area that’s still to be cleaned up.

The public is strongly opposed to privatisation. When the Coalition was considering privatising Medicare’s back-office processing, Labor portrayed this as a plan to privatise Medicare proper which, apparently, cost Malcolm Turnbull a lot of votes in the 2016 election.

Speaking of which, remember that Thatcher’s initial reforms were so unpopular she needed a war with Argentina to get re-elected. John Howard’s goods and services tax was so unpopular he went perilously close to losing the 1998 election.

I was puzzled to see Frydenberg associating Thatcher and Reagan with removing red tape. They aren’t remembered for anything so minor. Then I realised removing red tape was his euphemism for “deregulation”. The word now has such negative connotations he didn’t even want to say it – much less do it.

No, I don’t think we have anything to fear from Morrison’s inner Maggie.

For another thing, she wanted to close Britain’s inefficient coal mines, not defy economic reality and keep them going at all cost. And she, being a scientist, never had any doubt about the reality of climate change and the need to stop it.

The historian Manning Clark argued that, thanks to the circumstances of white settlement, Australia’s leaders could be divided into two groups: the “enlargers” and the “punishers and straighteners”. The enlargers wanted to get on with exploiting this land’s huge opportunities, whereas the punishers and straighteners, successors to the governors and prison guards, just wanted to go on running the place and keeping the lower orders in line.

If today’s Liberals were enlargers, they’d be resisting the temptation to help our coal and gas industries postpone their inevitable demise, and embracing this great opportunity to transform Australia into a global superpower in the production and export of renewable energy.

The Libs’ continuing role as punishers and straighteners is seen in their penchant for playing friends and enemies. Honourable friends and disreputable enemies. Honourable friends get rewarded with big tax cuts, which probably need to be brought forward – in the national interest, of course.

Although the Libs have lacked the mandate to cut government spending generally, they’ve selected various enemies whose lack of public sympathy means their money can be cut with impunity. Amid the massive government spending to counteract the lockdown, they’ve still singled out the universities for exclusion from the JobKeeper wage subsidy scheme or any other help of consequence.

But the people the Libs have most wanted to punish are the unemployed. When the lockdown caused unemployment to more than double, they had no choice but to increase the dole. But they kept their measures temporary, and introduced a two-class system.

Those travelling second class – who’ve lost any link to an employer – were given the JobSeeker unemployment benefit of $558 a week, about a quarter less than those in first class on JobKeeper.

We learnt last week that, after September, this will drop to $408, about a third less than the reduced JobKeeper payment. Means-testing will be resumed, as will penalties for failing to search for jobs. JobKeeper has been extended for six months, but the JobSeeker supplement only for three, with no guarantee it then won’t revert to $40 a day.

Why so tough? Because the unemployed aren’t like you and me. They’re shirkers. If you want them to work, you have to threaten punishment.

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Why we don't need to panic over big budget deficits

Despite the great majority of economists – including Reserve Bank governor Dr Philip Lowe – telling Scott Morrison and Treasurer Josh Frydenberg not to worry too much about a record blowout in the budget deficit at a time of a once-in-a-100-year pandemic, it’s clear many people – including many members of the Parliamentary Liberal Party – are very worried.

So much so, they think it’s a more pressing problem than sky-high unemployment. In consequence, the government’s nerve has cracked. The unspoken message from last week’s policy announcements and budget update was: we’re prepared to spend a further $22 billion to turn the feared "fiscal cliff" in September into a less precipitous fall, but after that all you’ll get to help the economy is the airy objectives and cold comfort of "reform".

When the Economic Society of Australia polled 50 leading economists recently, 88 per cent of them agreed that governments should provide ongoing budgetary support to boost demand during the economic crisis and recovery, "even if it means a substantial increase in public debt".

In a speech last week, Lowe said the budget blowout might seem quite a change to people used to low budget deficits and low levels of public debt. "But this is a change that is entirely manageable and affordable and it’s the right thing to do in the national interest," he said.

So why don’t most economists share the worries of so many conservative politicians, headline writers and ordinary citizens? Five reasons.

The first is, these are extraordinary times. I’m not sure Frydenberg is right in claiming the pandemic is "without doubt, the biggest shock this country has ever faced," but it’s certainly one of them. And it’s certainly the most economically devastating pandemic since the Spanish flu of 1919.

As we can see even more clearly in countries that have been less than successful than we have in containing the virus, between the direct damage caused by the lockdown and the psychological damage of great fear and uncertainty about what the future holds, the economy has been flattened.

The pandemic will be working to keep the economy down until an effective vaccine is widely available worldwide, which may be several years way. Just as World War I wasn’t all over by Christmas, nor will this be.

It’s thus not surprising that such extraordinary times should be leading to previously unknown levels of government spending, budget deficits and public debt. Except, of course, that nothing we’re likely to do comes anywhere near where we were by the end of World War II.

Second, as AMP Capital’s Dr Shane Oliver has said, "it makes sense for the public sector to borrow from households and businesses at a time when they have cut their spending, and to give the borrowed funds to help those businesses and individuals that need help".

People ask me where will all the money the government’s spending come from? Mainly from other Australians, who have money they’ve saved and want to lend. Others ask, who buys all those government bonds? There’s no shortage of financial institutions keen to buy, starting with your superannuation fund and other fund managers.

So much so that recent offerings have been way oversubscribed, allowing the government to borrow for five years at a yield (interest rate) of just 0.4 per cent, and for 10 years at just 0.9 per cent. With the inflation rate at 1.7 per cent, this means it’s costing us nothing to borrow.

Third, the federal government has run budget deficits in more than 80 per cent of the years since federation. If deficit and debt is such a terrible thing, how come we’re not in debtors’ prison already?

Fourth, just because our latest levels of debt and deficit are high by our standards, doesn’t mean they are by anyone else’s. Relative to the size of our economy, Australia’s net public debt is much smaller than the Eurozone’s, a hell of a lot smaller than the United States’ and almost invisible compared to Japan’s.

That’s why the International Monetary Fund – the outfit responsible for bailing out countries that get too deeply into debt – keeps assuring us we have plenty of "fiscal space". Translation: Why do you Aussies fret so much about so little debt?

Finally, it’s fine to fret about debt, but what’s the alternative? The alternative to using government spending to support the economy until the crisis finally passes is to let it continue shrinking, with more and more people being thrown out of work and businesses failing.

But this wouldn’t get the budget back to balance, it would cut tax collections even further and increase government spending on unemployment benefits, thus worsening the deficit and adding further to the debt. Why would that be a good deal?

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Frydenberg decides to favour limiting debt and deficit

Well, that’s a relief. The economy faced falling off a “fiscal cliff” if Scott Morrison had gone ahead with his plan to end the expensive JobKeeper and JobSeeker schemes in September, but he decided to keep them going at lower rates for another quarter or two. So, another expansionary (mini-) budget.

Is that what you think? It’s certainly what Treasurer Josh Frydenberg wants you to think. He’d like to have his cake and eat it: be seen to be continuing to stimulate (he’d prefer the term “support”) the recessed economy, while actually cutting back that support as he succumbs to his party’s ideology of putting fixing the budget ahead of fixing the continuing rise in unemployment.

Judged strictly, however, this week’s measures and mini-budget aren’t expansionary, they’re contractionary. While it’s true Morrison will continue the JobKeeper wage subsidy scheme for another six months from September, and continue the increase in the amount of the JobSeeker unemployment benefit for another three months, both will involve greatly reduced support.

Between September and February, the JobKeeper payment to workers will be cut from $1500 a fortnight to $1000 a fortnight for those who work more than 20 hours a week, and to $650 a fortnight for those working less than 20 hours a week. Either way, the whole scheme will be wound up after another six months.

After September, the JobSeeker supplement to the dole will be cut from $550 a fortnight to $250 a fortnight, and wound up after December.

Over the six months to September, JobKeeper is expected to cost something less than $70 billion, whereas the following six months will cost $16 billion. Slashing the JobKeeper supplement will reduce the additional cost to less than $4 billion.

And if a sharp recovery in private sector spending doesn’t occur in the next six months – it would be another of Morrison’s miracles if it did – then the reduction in fiscal (budgetary) support will leave the economy growing more slowly than it would have.

The point is, according to the strict Keynesian way of judging it, for a budget to be “expansionary”, the extra stimulus it provides has to be greater than the stimulus it previously provided. If you cut back the amount of stimulus being provided, that counts as “contractionary”.

Now, you can argue that, in its original form, JobKeeper was too generous, giving those few casual workers it helped more money per fortnight than they’d been earning.

There’s no denying that the scheme, having been pulled together in a great hurry, had its flaws. But to say it needed to be made fairer or more efficient, doesn’t change the fact that, if you fix those flaws in a way that hugely reduces the amount of money the government is pumping into the economy to limit its contraction, your policy change is contractionary.

From the perspective of keeping the government spending big while households and firms have good reasons to spend as little as possible, if you decide Ms X is being paid too much, you need to give the saving to someone else.

In other words, if you think like an accountant rather than an economist, you get the wrong answer. That’s the trouble with Liberal Party ideology: it’s the thinking of an accountant (“Oh no, that woman’s getting more than she should.” “Oh no, look at all that deficit and debt mounting up.”) rather than the thinking of an economist (“If the government isn’t spending at a time like this, who will be?”).

Putting it another way, in the Liberals’ drift to the Right, their way of thinking about how the economy works has reverted to being “pre-Keynesian” – to thinking about the economy the way their grandfathers did in the Great Depression when economic orthodoxy’s answer to the problem was to cut wages and balance the budget.

John Maynard Keynes convinced the economics profession that such thinking was exactly the wrong way to fix a recession or depression. That’s why few economists deny that he was the greatest economist of the 20th century – and why, at times like this, the thinking of almost every economist is heavily influenced by “the Keynesian revolution”.

When it suits them, however, the Libs are not averse to using a very Keynesian concept: that the budget has “automatic stabilisers” built into it. This week Frydenberg has been anxious to point out (mainly, I suspect, to Liberal voters) that the huge blowout in the budget deficit isn’t explained solely by his stimulus spending.

No, the deficit is up also because tax collections have collapsed. Many companies have had their profits greatly reduced or even turned to losses, meaning they’ll be paying much less company tax. More significantly, many people have had their incomes reduced, meaning they’ll be paying much less income tax.

As well, with many more people eligible for unemployment benefits, government spend on these payments has jumped (and would have even without the temporary supplement).

This week’s budget update shows that, over last financial year and the present one, Treasury expects the budget balance to worsen by $281 billion. The government’s discretionary policy measures explain just $177 billion of this, leaving the remaining 37 per cent - $104 billion – explained by the budget’s automatic response to the downturn in the economy.

As the budget papers explain, economists call this the work of the budget’s inbuilt automatic stabilisers, which reduce tax collections and increase government spending automatically when the economy turns down. (And do the opposite when the economy’s booming.)

The automatic stabilisers have thus helped to stabilise demand – stop it falling as much as it would have – without the government doing anything. Any explicit decisions the government makes to increase its spending or cut taxes thus add to the stabilisation already provided automatically.

And the budget papers add an important point: our progressive income tax system means that people’s after-tax income falls by less than their pre-tax income does – another aspect of the budget’s automatic role in limiting the fall in demand.

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Complacent government cutting back support far too early

Sorry, but this is the economic statement of a government that’s complacent about controlling the coronavirus and about getting a million unemployed people back to work. It sees its job as largely done. Now it’s time to quickly wind back its spending on supporting the economy and call for the bill.

You can tell Prime Minister Scott Morrison and Treasurer Josh Frydenberg decided this before the extent of the setbacks in Victoria and NSW became fully apparent. They have assumed that after the six-week lockdown in Melbourne, everything will be fine again.

That’s quite an assumption, especially because those two states account for more than half the national economy.

A less complacent assumption would have been that, in the many months likely to pass before a vaccine is widely available, several further major setbacks could occur and delay the return to confidence by consumers and businesses that normal economic times had resumed and it was time to get on with spending and investing.

If so, the government might have a lot more spending to do to keep the economy above water until the pandemic’s “once-in-a-century shock” to the economy has passed.

Were you shocked by the news of the highest budget deficits since World War II, leading to net public debt already up to $488 billion and expected to hit $677 billion by next June?

Such shock seems to have been the main goal of Thursday’s budget update. The government’s spin doctors announced the fate of both the JobKeeper wage subsidy scheme and the temporary doubling of the JobSeeker unemployment benefit two days earlier so as to now heighten public concern about all that money being spent, and get us to accept the government’s decision that spending should be wound back pronto.

And that’s what Morrison announced on Tuesday – though you could be forgiven for not noticing it through all the spin. The government had gone for weeks threatening to end both schemes in September.

So when Morrison announced that they would be continued for another six months, in modified form, there was a sigh of relief. Few people noticed that the threatened “fiscal cliff” would now be just a precipitous incline.

It’s estimated that two-thirds of companies – and their employees – will be off JobKeeper by early next year. Which will be fine provided the economy bounces back as strongly as the government seems to believe it will.

But Treasury’s forecast that the economy will grow by 2.5 per cent in 2021 seems optimistic to me – and in any case, wouldn’t be sufficient to do much to turn around the 870,000 jobs lost between March and May this year and the million workers who saw their hours cut.

What seems clear is that the government is anxious to rein in the growth in its spending so as to limit the growth in its debt. What’s much harder is to find economists who agree that, with the economy’s prospects still so worrying, now is the time to be cautious and pull back.

A poll of 50 leading economists, conducted by the Economic Society of Australia, found that 44 of them agreed the government should use its budget to boost demand during the economic crisis and recovery, “even if it means a substantial increase in public debt”.

And if Reserve Bank Governor Philip Lowe shares the government’s worries about debt and deficit, he’s got a strange way of showing it.

Only on Tuesday he said that “debt across all levels of government in Australia, relative to the size of the economy, is much lower than in many other countries and it is likely to remain so. The Australian government can borrow at the lowest interest rates since Federation.”

So it is “well placed to smooth out the shock to private incomes and support the economy through the pandemic”.

It all translates to economists telling the government it’s the “eye-watering” levels of unemployment it should be most worried about.

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How Morrison could reward mothers hit hard by the recession

This recession is different in many ways. One is that it has hit female workers harder than male workers. So a good test of the adequacy of Scott Morrison and Josh Frydenberg’s mini-budget on Thursday will be how much it focuses on the needs of women.

Past recessions have hit men a lot harder than women because they’ve been concentrated in male-dominated industries such as manufacturing and construction. In this coronacession, manufacturing and construction have largely been able to continue working while the lockdown has closed female-dominated service industries such as accommodation and food services, retail, arts and recreation.

Recessions always hit part-time and casual workers harder, and these categories too include more women than men. Similarly, recessions always hit the lower-paid harder, and women are generally paid less than men. The imbalance did reduce a lot in June, however, as some service industries have been able to resume trading.

There’s evidence that a higher proportion of employed women than men have been able to work from home, making it even more likely that, when schools have been closed, women have done more of the home schooling. It’s also likely that some women have chosen to work fewer hours so as to mind kids at home.

But the case for the needs of women being front-of-mind in the government’s budgetary response to the recession rests on more than gender fairness. In recessions, governments use their budgets not just to help those who lose their jobs and to bolster the economy at a time when even those who’ve kept their jobs are limiting their spending, but also to give the economy a positive boost. To get things moving again.

Morrison has already started talking about the need for reforms to the structure of the economy to encourage faster growth in the years ahead. (The unmentionable truth is that, in the months before the arrival of the virus, the economy had lost momentum and was growing only slowly. Ending the recession to return to that status quo is not an exciting prospect.)


If Morrison decides to bring forward either or both of the second and third stages of the tax cuts he promised in last year’s budget (presently legislated to take effect in July 2022 and July 2024), it’s a safe bet he’ll justify that not just as giving the economy an immediate boost but also improving incentives for people to work and invest in coming years.

It’s a nice idea. But it’s a nicer idea from the perspective of a well-paid male. From the perspective of less well-paid females, not so much. When the cuts are fully implemented, the income tax I and others on the top tax rate pay will have been cut by 6 cents in every dollar of earnings. Will this motivate me and other high income-earners to work a lot harder than we already do? Oh gosh yes. Please believe that.

By contrast, the total saving for most women working part-time or in typical jobs done by females will be no more than about 1 cent in the dollar. That will motivate no one.

When well-paid men think about reform, their thoughts go immediately to the enticing idea of paying less income tax. They see the world from their point of view and are quick to tell you that any women earning as much as they do will get the same tax cuts they get. Sorry, gender doesn’t apply to the tax scales.

Except that it does when you add in our means-tested social benefits system. As female tax economists have been trying to tell male econocrats and politicians for ages, the one really significant disincentive to working in our tax-and-transfer system applies to mothers (and the occasional house husband) who want to go from working part-time to working full-time.

Naturally, every extra hour they work is taxed. But because eligibility for the family benefit is based on the combined income of couples, they soon find that each extra dollar of wages cuts back the amount of family benefit.

Professor Miranda Stewart, of the University of Melbourne, calculates that “second earners” wanting to work more days a week face an effective marginal tax rate of roughly 90 cents in the dollar. Add the extra cost of childcare and working more days will often leave mothers actually out of pocket. That doesn’t affect incentives?

If Morrison really wanted to change the structure of the economy in a way that, once the recession was behind us, would encourage faster economic growth, he’d drop his tax cuts for high earners and use this opportunity to remove a barrier to women putting their ever-higher levels of education to work in paid employment.

If that’s all too hard, he could do much good for women simply by making permanent his now-abandoned emergency measure of making childcare free. Too expensive? It would cost a lot less than his tax cuts for high (mainly male) income-earners.

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THE AUSTRALIAN GOVERNMENT’S ECONOMIC RESPONSE TO THE CORONAVIRUS

UBS HSC Online Economics Day, Tuesday, July 21, 2020

Australia is in the grip of a recession that’s its deepest since the Great Depression of the 1930, but also it’s most unusual, being the consequence not of problems in the economy, but of the effects of the coronavirus pandemic and the government’s response to it. After the government realised the virus had spread to Australia, it banned foreign arrivals from China at the start of February and progressively widened the ban to include all foreign nationals, with all returning Australians required to enter 14-day quarantine. In concert with the state governments, it then moved to limit the spread of the virus within Australia by ordering many industries, schools and universities to close. It required people to work from home where possible, and leave their homes as little as possible. During this “lockdown”, hand-washing and “social distancing” were encouraged, and large gatherings and unnecessary travel were banned.

This hugely reduced economic activity, prompting many businesses with little revenue coming in to lay off workers or reduce the hours of part-time workers. So from mid-March, the government introduced a series of measures intended to assist firms facing financial pressures, helping them retain their staff until the crisis had passed, to help people who had lost their jobs, maintain the training of apprentices and trainees, help firms and households having difficulty paying their rent, and assist industries with particular problems, such as housing and airlines. Taken together, these measures would provide fiscal (budgetary) support to the economy in general, at a time when private sector demand was weak. All these measures were designed to be targeted to easing particular problems and to be temporary, running for about six months to the end of September 2020.

The government’s two most important measures were the $70-billion JobKeeper wage subsidy scheme, which paid those employers whose revenue had fallen significantly subsidies of $1500 per fortnight for each worker they retained. This unprecedented and hugely generous scheme – adapted from similar schemes introduced in Britain and the US – was intended to maintain the link between an employer and its workers until the crisis had passed and normal business could resume. For those workers unable to benefit from the JobKeeper scheme, the JobSeeker coronavirus supplement effectively doubled unemployment benefits by adding a supplement of $1100 a fortnight for six months.

In mid-March the Reserve Bank made the last contribution it was able to make toward stimulating demand. First, it cut the official cash rate by 0.25 percentage points to its effective lower bound of 0.25 per cent, and promised the rate would not be raised until the rate of unemployment was falling towards its full employment level (about 4.5 per cent) and the inflation rate was in the target band of 2 to 3 per cent. It made a move to “quantitative easing” by setting at target of 0.25 per cent for the yield on Australian government bonds. That is, it promised to buy as many second-hand bonds as was necessary to get the yield down to 0.25 per cent. So far, this has involved it creating credit (or “printing money”) only to the extent of about $50 billion. Third, to encourage the banks to ease their repayment requirements on hard-pressed small businesses, the RBA offered to lend them up to $90 billion at the concessional rate of 0.25 per cent. This too would involve the RBA creating credit. So far, however, there has been little demand for this relief.

The crisis caused the annual federal budget to be postponed from May until Tuesday, October 6 (just a few weeks before the HSC Economics paper on Friday, October 23). In the meantime, however, Treasurer Josh Frydenberg will deliver an economic statement this Thursday, July 23, in which he will announce changes to the JobKeeper and JobSeeker schemes after they are due to expire at the end of September. He will also announce new forecasts for the economy and the budget deficit.

Definition of recession

Don’t be misled by media assertions that the economy is in recession when real GDP falls in two successive quarters. This mere rule of thumb has no status in economics and can be misleading. It puts all the emphasis on production and none on the real reason people fear recessions: rapidly rising unemployment. A former senior Treasury official has defined recession as: “a sustained period of either weak growth or falling real GDP, accompanied by a significant rise in the unemployment rate.” In February 2020, before the virus struck, the unemployment rate was 5.1. By June, just four months later, it had leapt to 7.4 per cent. Over the same period, the rate of under-employment jumped from 8.7 per cent to 11.7 per cent. That’s all you need to know to be certain we’re in a deep recession. But the effect of the lockdown and the JobKeeper subsidy (which involves many people being counted as employed although they are doing no work) means the “effective” rate of unemployment is about 13 per cent [graph 2].

How this recession differs from past recessions

This recession is different partly because it’s much worse than the previous recessions in the mid-1970s, early 1980s and early 1990s – which was almost 30 years ago. Whereas in the early ‘80s unemployment peaked at 10 per cent, and in the early ‘90s at 11 per cent, this time we are already up to 13 per cent and counting [graph1]. The contraction in GDP is also likely to be a lot bigger this time than in those earlier episodes.

But this recession is different – even unique - because its cause is non-economic. To stop the spread of the virus, the government ordered a large part of the economy to cease trading. And even if it hadn’t, many people would have cut their economic activity and kept to their homes to protect themselves from the virus. Normally, recessions occur because a boom has got out of hand and has prompted the authorities to push interest rates too high in an effort to control inflation. They often end up overdoing it and accidentally causing a downturn.

The unique cause of this recession means that, whereas previously the brunt of the downturn has been borne by workers in manufacturing and construction, this time it’s workers in the services sector. The hardest hit have been in accommodation, restaurants and cafes; retail; and arts and recreation. This change in the industrial composition of the recession means that whereas it’s usually men who bear the brunt, this time it’s women. It’s always the young – particularly education-leavers - who are hit hardest by a recession and, I’m sorry to tell you, this time is no exception.

The budget, debt and deficit

All recessions involve the government using the two main instruments of macroeconomic management to cushion the economy from the contraction in private sector demand and, more positively, stimulate an expansion in private demand, by cutting interest rates, increasing government spending, or cutting taxes. This time, however, monetary policy has pretty much done its dash and all the work falls to fiscal policy – the budget.

Whereas the government had managed finally to return the budget to balance in 2018-19 and was proudly looking forward to a surplus in the financial year just ended and many further surpluses in the years ahead, all that has been turned on its head by the response to the virus. The mini-budget on July 23 will give us the latest official figures, but unofficial estimates from Dr Shane Oliver suggest a deficit of about $95 billion (or almost 5 per cent of GDP) in the financial year to June this year, rising to a deficit of more than $220 billion (or 11 per cent of GDP) in 2020-21. Note that this likely enormous blowout in the budget deficit is explained not just by increased stimulus spending, but also by the effect of the recession in causing tax collections to fall. The stimulus is an increase in the “structural” component of the deficit, whereas the fall in tax collections is an increase in the “cyclical” component. In Oliver’s estimates, the two effects are of roughly equal size.

How the budget deficit will be funded

There are various ways the budget deficit could be funded but, at least since the early 1980s, it has always been funded by the government borrowing from the public rather than from the RBA (which would constitute printing money). The bonds are sold by regular auctions conducted by a branch of the Treasury. There is never any shortage of banks, superannuation funds, other fund managers and other countries’ central banks wanting to buy the bonds. This can be seen in the government’s ability in recent months to sell 10-year bonds paying an effective interest rate of less than 1 per cent. It is true, however, that when the RBA buys second-hand government bonds previously sold to financial institutions by Treasury, and pays for those bonds merely by crediting those institutions’ bank account with the RBA, it is doing the modern equivalent of printing money.

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The economy can't fully recover until the virus is gone

It’s time we stopped debating suppression versus elimination of the coronavirus and got serious: let’s make it a party-political issue. Liberal voters should defend suppression and denigrate elimination, while Labor voters do the opposite. Or vice versa.

This wouldn’t get us anywhere, of course, just as the politicisation of climate change has long crippled our efforts to make real progress. But it would gratify those who follow politics like others follow sport, and it would be a fillip for a media more interested in controversy than solutions.

But above all, it would relieve the rest of us of the mental effort of judging the merits of suppression versus elimination. To decide what our opinion was, all we’d need to do is remember which party we vote for.

We sub-contract the job of thinking through important policy issues to our ever-trustworthy political representatives, who can always be relied on to put our interests ahead of their own. And then we wonder why we’re making so little progress in solving the nation’s problems.

What thinking I’ve managed to do about our setback in getting on top of the virus makes me unconvinced that the policy of suppression – or “aggressive suppression” as Scott Morrison prefers to call it – rather than elimination explains the relapse. Nor that switching from suppression to elimination would prevent further relapses.

This controversy – which the hugely “aggressive” responses of Morrison and NSW premier Gladys Berejiklian have done much to puff up – is a distinction in search of a difference. Certainly, it’s a distinction much easier to see on the pages of a textbook than on the ground.

Morrison and Berejiklian want us to believe the economic cost of elimination would be much higher than for suppression. I doubt that – just as I doubt their critics’ retort that they’re putting the interests of The Economy ahead of Australians’ lives.

This debate is spurious because it reads the problem wrong. The eradication party is preoccupied with “community spread” and their belief that asymptomatic carriers mean there is huge community spread lurking under the radar, waiting to rear its head. If so, it’s gone well hidden for many weeks.

The simple truth is, the virus comes to us from abroad. Our biggest problem is its continued spread in the rest of the world. Every time we let through a carrier from abroad it spreads exponentially, triggering much community transmission. We then have to frantically identify everyone who’s been infected and stop them infecting others.

Which is just what we have done – with great success in every state. The Kiwis have done the same. What’s changed? As best we can tell, a breakdown in Melbourne’s quarantine of returning travellers – including the people staffing the quarantine – combined with poor contact tracing has allowed a flare-up in cases.

And again, as best we can tell, Sydney’s smaller outbreak is best explained by the arrival of a super spreader from Melbourne. Perhaps more than one.

The point is, if you have weaknesses in your quarantine regime, or deficient contact tracing, it doesn’t matter whether the label on the policy you’re pursuing says “elimination” or “suppression”. As economist-turned-businessman Andrew Mohl has reminded us, in real life what matters more is not the strategy you choose, but how well you execute it.

The saintly, eliminating Kiwis, are just one badly handled quarantine breach away from ignominy. It follows that what we should be doing now is tightening up our quarantine arrangements and, in Victoria at least, greatly improving contact tracing.

It also follows that Sydney and Melbourne have had – and always will have – the greatest infection problem, simply because they’re the country’s two main international gateways. While ever there’s some doubt about the effectiveness of these two’s quarantine arrangements, the other states are justified in closing their borders to the south-eastern reprobates. Better four states virus-free than none.

It’s easier to see now than it was a month ago that, with the rest of the world still highly virus-prone, lapses and setbacks were inevitable. And with no vaccine yet on the horizon, that may remain true for months, even years to come.

There seems little doubt that Melbourne’s return to lockdown will set back the recovery in the national economy both directly (because of Melbourne’s one-fifth share of it) and indirectly, because of the fears and uncertainty it engenders in the rest of the county.

There may be many further bumps in the road ahead, which will weaken the economy and slow the recovery. Until a vaccine is available globally, lasting elimination is a delusion. We shall either have to hide under the bed till then, or become inured to living in a much riskier world.

The one good thing is that this nasty return to reality has come before rather than after Thursday’s mini-budget reset.

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We won't achieve economic reform until we start co-operating

If you wonder why the push for economic reform has ground to a halt, I’ve discovered the reason. It’s because the foundational assumption of conventional economics – that individuals competing in pursuit of their self-interest make us all better off – is only half the truth.

If the mention of economic reform made you think of tax reform, then you’re making my point. Those who want a higher GST because they’d benefit if the proceeds were used to lower income or company tax are stymied by the many punters convinced they’d be worse off if this “reform” came to pass.

Many other cases for reform suffer the same fate. Your pursuit of your self-interest is neutered by my pursuit of my mine.

What the conventional economic model misses with its emphasis on individuals, competition and self-interest is that much of the success of the human animal – including its success economically – is owed to people co-operating to achieve changes of benefit to the whole community.

Often, norms of socially acceptable behaviour – entrenched views about what behaviour is ethical and what isn’t - are used to encourage people to put the interests of the group ahead of their own immediate interests. Markets work much better, for instance, if it’s realistic to assume that almost all the people you deal with can be trusted to act honestly.

All this applies in spades to our failure to make progress in the area of reform that’s more important to our economic future even than conquering the coronavirus: stopping emissions of greenhouse gases from wrecking the climate.

Here, the owners and miners of our huge remaining deposits of coal and gas are fighting tooth and nail to delay the day when those deposits become worthless, while the rest of us are encouraged to put the frightening thought of having to pay a bit more for electricity and petrol ahead of the future environmental and economic wellbeing of our children and grandchildren.

It’s okay for the oldies – who, until this year’s bushfire conflagration, fondly imagined they wouldn’t live long enough to suffer the consequences of their selfish short-sightedness. And those who will suffer the consequences have either yet to be born or are only just realising what a mess their loving parents are leaving for them.

But the deterrent to action isn’t just that the (modest) adjustment costs are upfront, whereas the (much greater) costs of inaction are off in the uncertain future. It’s also that the greenhouse effect is global, not local.

As the climate-change deniers love reminding us, no amount of effort to reduce emissions on our part will make much difference until people in other parts of the world are doing the same. In which case, why don’t you and I do nothing and leave it to all the others? (Economists call this the “free-rider” problem.)

All this may explain why a recent discussion paper from the Academy of the Social Sciences in Australia, Efficient, Effective and Fair, included a chapter on the moral case for action on climate change, written by Professor Garrett Cullity, a philosopher from the University of Adelaide.

Cullity argues there are five reasons why climate change is a moral issue, each of which is independent of the others. The first is that it involves many causes of harm including extreme weather events, tropical diseases, and malnutrition.

“These harms are primarily borne by the most vulnerable members of the global community,” he says. “We should be morally concerned to reduce the amount of harm we do to them.”

The second argument holds if we believe there’s a risk of serious harm in the future but can't be sure it will come to pass. “Action that imposes serious risks on others can be morally wrong because it is negligent and reckless, independent of the harm that actually eventuates,” Cullity says.

These first two arguments give us moral duties of both “mitigation” (reducing the further damage our emissions are doing) and “adaptation” (helping vulnerable people to adapt to the damage already done).

“They apply not just to national governments, but to any agent whose actions contribute to increasing atmospheric greenhouse gas concentrations – including state and local governments, cities, corporations, non-government associations and individuals.

“And they apply to each of these agents unilaterally. The moral duty not to engage in actions that harm or endanger others is not a duty that we are exempted from when someone else is not complying with it.

“The strength of the duty is proportional to the harm or risk imposed if the duty is not followed, and it may be related also to the capacity to influence others to comply with their duty.”

The third argument concerns “contributional fairness”. When a group needs to achieve something important by acting together and is doing so by sharing the overall burden among its members, failure to contribute an equitable share of that burden amounts to free-riding. Duties of fair contribution apply to groups of any size.

In the case of a wealthy country such as Australia, the size of our contribution to the solution should reflect the size of our contribution to causing the problem, the benefit we have derived from past emissions-producing economic activity, and our relatively great “ability to pay”, as tax economists put it.

The remaining two moral arguments concern the responsibility of national governments. If you accept that they have a duty to protect future citizens, not just present ones, it follows that they must contribute to global mitigation, not just local adaptation. And, since the economic costs of responding to the problem get higher the longer you delay, they have a moral duty to begin now.

Conventional economics doesn’t take much interest in morality. But economies where everyone sticks out for Number One stop working very well. And self-interest isn’t enough to solve a “wicked” problem like climate change.

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Don't forget those the pandemic leaves out in the cold

After a fortnight's patriotic duty swanning round the backblocks of the state dispensing modest monetary good cheer – and discovering we were far from the only cityslickers doing it – it's back to a city plunged into renewed foreboding. The greatest concern is the pandemic's returning risk to our lives but, for me, this worsens rather than detracts attention from the great economic cost: protracted unemployment. A second wave of the virus would bring a double-dip recession.

When Treasurer Josh Frydenberg – a man so committed to looking on the bright side he's positively Pythonesque – feels it his duty to advise that the official unemployment rate of 7.1 per cent is actually an effective rate of 13.3 per cent once you allow for the peculiarities of the lockdown, you know we must be in deep trouble.

He wouldn't be issuing such a warning if he didn't need to prepare us for next week's mini-budget, which the setbacks in Melbourne and Sydney will have caused to be a lot less penny-pinching than earlier planned.

Where before Scott Morrison might have told himself the worst was over and it was time to start limiting the damage to his precious budget, now he must keep the money flowing so as to limit the damage to the livelihoods of many workers and their families.

Back in March, many of the government's initial measures to limit the economic damage caused by his harsh but unavoidable efforts to stop the spread of the virus – including the innovative JobKeeper wage subsidy scheme and JobSeeker's doubling of the rate of unemployment benefits – were timed to last six months and so end in late September.

The mini-budget's main purpose is to announce what will happen after that. A point to remember is that these measures don't just directly relieve the financial pressure on people who've lost their jobs, they benefit all of us indirectly by injecting additional money into the economy, which then flows through many hands – shopkeepers and workers alike – keeping the economy moving and thus limiting the further rise in joblessness.

A further thing to remember is that the unemployed don't only need money to help them keep body and soul together and feed their families (not to mention money to keep their mobile working, travel to job interviews and be appropriately dressed), they also need help finding another job.

The terrible thing about recessions is that they throw the economy up in the air, so to speak, and what eventually comes down is different to what went up. Recessions accelerate the changing structure of the economy. The industries and occupations change, with some contracting and others expanding.

So the jobs move, and employers' demand for particular occupations changes. Even with assistance from the wonders of the internet, many workers need help to locate a new job, need guidance to give up on industry A and try industry B, or even help to retrain for a job in another occupation where demand is greater.

After a severe recession, it can take a year or more before the quantity of goods and services produced each quarter has returned to where it was before it started falling, and several years before it gets back to where it would have been had the recession not happened.

But it takes longer for employment to return to where it was and far longer for unemployment to fall. After the last recession, the number of people on unemployment benefits fell by almost half, from a peak of 890,000 in 1993 to 464,000. But get this: it took 14 years.

If that wasn't bad enough, in that time, the number of recipients who'd been on the dole for more than a year fell by only 20 per cent to 276,000.

One lesson from this is that it's the unemployed who'll bear most of the economic cost of this pandemic, however long it lasts. It will take longer than you may think for people who lose their jobs to find another. While they're out in the cold, we who've kept our jobs have a moral obligation to ensure they're given a reasonable sum to live on, as well as a lot of help finding a new berth.

Many will find a job within a month or two, but some will take much longer. And the longer it takes, the less likely it becomes. These are people who deserve extra help to avoid getting stuck in the mud at the bottom of the unemployment pool, and we should give it.

Last week the Australian Council of Social Service called for JobKeeper to be phased down only gradually, and for the JobSeeker payment to be increased permanently by at least $185 a week, which would lift it to the rate of the age and other pensions.

The focus of Centrelink and the Job Network should be switched from penalising the jobless for concocted infringements to actually helping them find jobs and retrain. It's the least we should do.

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