How Morrison can give us a bright economic future

A big part of getting economic life back to normal involves restoring people’s faith that the future will be full of opportunity for progress. But that ain’t easy because the gloom of recession kills our belief that things could ever get better. And the longer we think like that, the truer it becomes.

So Scott Morrison needs to accept the paradox that returning the economy to normal demands that we don’t return to squabbling politics as usual, nor to governing primarily in the interests of the Liberal Party base and its corporate donors.

Why not? Because it wasn’t working well even before the virus arrived. The economy’s growth was weak and, that being so, business was reluctant to invest. Morrison is right to say we must grow our way out of debt and deficit, and that – ultimately, at least – we need a private sector-led recovery.

But with the recession leaving business with even more idle production capacity than it had last December, it’s delusional to expect that some tax incentive could prompt a surge in business investment.

So what can the government do that would get business investing? It can fix the dysfunctional attitudes to energy policy that are blocking much-needed investment in next-generation electricity production.

And the plain truth is that no government refusing to face the reality of climate change stands any hope of convincing us that our economic future is bright. What’s so stupid is that if the government weren’t so committed to helping losers fend off inevitable change in the economy’s structure, it would see more clearly the huge potential for Australia to be a big winner in the post-carbon world.

Only drawback: exploiting that potential would require huge private sector investment. Oh, that’s right, it’s the present lack of need for more investment that will slow any recovery.

Climate change has already started to bring much damage to our personal health, agriculture and tourism, but our hesitation to get on with helping to combat it is partly explained by our long-standing and lucrative comparative advantage as a major exporter of fossil fuels.

But a report by Tony Wood and colleagues at the Grattan Institute, to be published today, confirms Professor Ross Garnaut’s assessment that our abundant resources of wind and sun give us a potential comparative advantage in renewable energy – particularly if we get in early.

Wood also confirms Garnaut’s view that our money-making potential lies not so much in exporting renewable energy directly but indirectly, by using wind and solar to make energy-intensive "green" commodities for export.

Get it? If we play our cards right – if Morrison displays his newfound ability to provide the nation with genuine leadership – we could begin a whole new era of manufacturing industry in Australia, only this time one built on comparative advantage rather than protection.

Wood says the list of potential energy-intensive manufactures includes aluminium, aviation fuel, ammonia and steel. Tens of thousands of jobs could be created, comparable to the existing 55,000 geographically-concentrated carbon-intensive jobs.

How does a revived green manufacturing industry sound as a plan that could convince climate-change worriers (that is, everyone with a brain), business people and workers that there is a future for our economy?

And here’s the best bit: Wood says the economics favour establishing the new green manufacturing industries where a large industrial workforce is already established - such as those in central Queensland and the Hunter Valley.

"It is cheaper to make green steel in those places, where labour is available and affordable, than in the Pilbara – despite the cost of shipping iron ore to the east coast," he finds.

Notice the political attraction of this idea? You don’t leave the workers in these regions to their fate as the world’s inevitable move away from fossil fuels turns their mines into stranded assets, you set them up to work in a new carbon-free industry.

Wood’s investigations see most potential in moving to "green steel". At present, most steel is made by using coking coal and a blast furnace to reduce iron ore to iron metal. Trouble is, burning the coal produces much carbon dioxide. Green steel, by contrast, involves using renewables electricity to produce hydrogen for “direct reduction”, turning the ore to metal, with water as the byproduct.

Ultimately, the massive investment needed for new green industries would have to come from the private sector. But the government would need to get the ball rolling by helping to fund a steel flagship project – maybe one that starts by using natural gas, before progressing to hydrogen.

The happy notion that governments can sit back while the private sector pioneers new, radically different industries works well in textbooks, but not the real world.

Read more >>

Economic managers bank on us being smart as the average bear

It’s a lovely, comforting way to think about our economic problem. To beat the virus, we’ve had to put the economy into hibernation, but now it’s time for the bear to come out of its cave and get back to normal living. And it seems that’s just what Reserve Bank governor Dr Philip Lowe expects to happen.

The "baseline scenario" he outlined this week sees real gross domestic product falling by about 10 per cent over the first half of this year but then, it seems, growing by roughly 4 per cent in the second half, so that real GDP in December is just 6 per cent lower than it was in the December quarter last year. Then it “bounces back” to grow by 6 per cent over the course of next year.

Not bad, eh? We go down by 6 per cent this year, but then back up by 6 per cent next year. It can’t be quite so good as that sounds, however, because the rate of unemployment – which is expected roughly to have doubled to 10 per cent by the end of next month, is also expected to still be above 7 per cent at the end of next year.

These figures tell us that returning to positive growth in GDP is easier than returning to low unemployment. Unemployment goes up a lot faster than it comes down. That’s partly because the rate at which GDP grows isn’t as important as the level it attains. It’s the level that determines how many jobs there’ll be.

Now, no one can be sure how far the economy will fall, or how strongly it will recover when it stops falling. That’s always true, but it’s even truer with this recession because its cause is so different to past recessions.

This one's happened in the twinkling of an eye, as the government simply ordered many industries to close. So, when they’re allowed to reopen, maybe things will return to near normal pretty quickly.

Maybe - but I find it hard to believe.

Economists always rely on metaphors – often mixed – to explain the mysteries of economics to normal people. But we must be sure those metaphors don’t mislead us.

Bears have evolved to survive harsh winters intact, but humans haven’t. Bears may be used to it, but it’s an unprecedented, costly, worrying and uncertain period for our businesses and their employees.

The econocrats admit that "some jobs and businesses will have been lost permanently" and that firms and households are suffering from a "high level of uncertainty about the future" and will engage in "precautionary behaviour". They’ll be saving, not spending. If so, we won’t emerge from the cave in the same shape we went in.

Dr Richard Denniss and his team at the Australia Institute think tank have been examining the way our economy has recovered in previous recessions. They note that the expected contraction this time is far bigger than in the past: a fall in real GDP of about 10 per cent, compared to falls of 3.8 per cent in the recession of the early 1980s and just 1.4 per cent in our most recent recession in the early 1990s.

They also note that, in more recent years, the economy has grown much more slowly than it used to. Between the 1991 recession and the global financial crisis, our average rate of growth was 0.9 per cent a quarter, or 3.5 per cent a year. Since the financial crisis, however, it’s slowed to average 0.6 per cent a quarter, or 2.6 per cent a year.

Yet the Reserve Bank’s most likely scenario sees the economy bouncing back after the 10 per cent fall to grow by about 2 per cent a quarter from the end of next month. That’s growth at an annualised rate of roughly 8 per cent. Then, next year, it grows at an annual rate of 6 per cent, or roughly 1.5 per cent a quarter.

Now, since the economy will have so much spare capacity, it is technically possible for it to grow at such rapid rates for a couple of years before that idle capacity is used up.

But how likely is it? As Denniss asks, do recessions actually cause recoveries? Or, to test the “bounce back” metaphor, are economies like a rubber ball that hits the ground then bounces straight back up? Does the faster it goes down mean the faster it comes back up?

Some of our past recessions have had this classic V shape. But by no means all, or even most, of them. Sometimes they bounce back, sometimes they crawl.

There’s no law that says economies contract for only two quarters before they start growing. Nor that once they start growing, they strengthen. If you’ve lived through a few recessions, you’ll remember the expression “bumping along the bottom” and headlines about “jobless growth”.

So, given this varied experience, why are forecasts of quick and easy recoveries so common? Denniss thinks it may be because of the strange way macro-economists’ models are constructed. In the jargon, most macro models are Keynesian in the short term, but neo-classical in the (undefined) long term.

The neo-classical model assumes economies are always at full employment, meaning their growth over time is determined solely by growth in the three factors determining the increase in the economy’s production capacity: population, participation in the labour force and the productivity of labour.

The Keynesian short-term recognises that some “fluctuation” (a recession, say) can cause the economy to be below full employment. But the neo-classical long-term assumes the economy will always return to full employment at the level predetermined by the aforementioned “three Ps”.

So the economy’s bounce back is built into the model and must occur. Denniss says the trouble with this is it gives policymakers misplaced faith that GDP will bounce back, when it’s more likely that “GDP needs to be dragged back by sustained, and expensive, government stimulus”.

Read more >>

Hard lessons on how recessions work and why we hate them

Forgive me for boasting about how old I am, but this coronacession – aka the Great Lockdown – will be the fourth severe recession of my career as an economic journalist. That makes recessions my special subject, though I’ve not had much call to talk about them for almost 30 years.

I was too young to remember much of Bob Menzies’ Credit Squeeze, which came within a whisker of tossing him out of office in 1961. But I was established in journalism before I saw the recession of the mid-1970s add the last nail to the coffin of the Whitlam government.

Malcolm Fraser’s prime ministership was cut short by the recession of the early 1980s. Bob Hawke’s successor, Paul Keating, should have been dispensed with at the 1993 election after the recession of the early 1990s, but was saved by our inordinate fear of Dr John Hewson’s proposed goods and services tax. By the next election in 1996, however, voters were on their verandahs with baseball bats waiting for Keating.

So, lesson No. 1: governments that preside over recessions usually get the blame for them. Lesson No. 2: in Australia, recessions happen roughly every seven years – or so I imagined at the time.

When the financial crisis of 2008 failed to sweep us into the world’s Great Recession, I was denied what I fondly assumed would be the biggest recession of my career. Why? Because Kevin Rudd did exactly what his econocrats told him to – and it worked.

In truth, we did have a recession, but one too small to remember. Another truth: more than a decade later, our economy had still not got back fully to normal and was in a weak state when the virus hit us some weeks ago.

In the decades since our last experience of severe recession, silly people in the financial markets and the media have given us the impression that a recession consists of real gross domestic product falling for two quarters in succession.

If you haven’t already, you’ll soon realise what nonsense that is. Lesson No. 3: the defining, terrible characteristic of recessions is soaring unemployment. That’s what makes people fear them so much. “What if I lost my job? How would I pay the mortgage? What about my kids? I’ve got one just finishing uni. Oh, what an appalling stuff-up. Those politicians are hopeless.”

Recessions inflict great harm on those who lose their jobs or their businesses. They make people terribly anxious. They heighten money worries and fights between spouses. They kill off any optimism about the future, leaving the public depressed and surly for month after month. They bark at every economist.

Lesson No. 4: unemployment shoots up, but crawls back down. I remember how much fuss there was when the number on unemployment benefits hit a million under the Hawke government. Last week Scott Morrison announced that, in just a few weeks, the number of people on the JobSeeker allowance (the latest in a long list of bureaucratic euphemisms for the dole) had topped 1.3 million – with a further 300,000 applications to be processed.

After the Hawke-Keating recession (the one we didn’t really have to have), it took almost 14 years for the rate of unemployment to get back down to the 5.9 per cent it was in November 1989.

And research by Professor Bob Gregory, of the Australian National University, suggests that people who’ve been unable to find a job for two years are unlikely to find one again. In recessions past, governments have hidden away some of these people by putting them on the disability pension.

In this recession, the new JobKeeper payment – a worthy measure – is helping to understate the number of workers counted as unemployed.

Lesson No. 5: though economic journalists make much of unemployment statistics, what brings the reality of high unemployment home to the public is TV footage of ashen-faced workers streaming out of factory gates after being laid off.

What did it this time was footage of all those young people queuing up the street and around the corner from Centrelink. Lesson No. 6: this recession, like all of them, will hit the young hardest, particularly those leaving the education system to start working. As part of this, the low-skilled are always hit harder.

What’s different this time – due to the recession’s unique cause: the government hitting the economy on the head with a hammer – is that job losses are so heavily concentrated in a few sectors: tourism and hospitality, arts and entertainment, and universities.

My final lesson is that public attitudes towards the unemployed are cyclical. Between recessions, many people see them as too lazy to work. Come the next recession, however, and we ooze sympathy. We know people who’ve lost their jobs and we’re hoping neither we nor our kids will be joining them.

So, give the jobless a hard time with pettifogging officiousness, robo-debt, payment by card not cash, Work for the Dole, drug testing, reverting to $40 a day? No, wouldn’t dream of it. Not if you’re hoping to be re-elected.

Read more >>

First the economy needs CPR. We'll worry about reform later

I can’t take seriously all those people saying we mustn’t waste a crisis, but seize this great opportunity to introduce sweeping economic reform. It’s like telling a baby who hasn’t yet learnt to walk it should start training for the Olympics.

It’s true, of course, that we won’t get back to economic life as we used to know it – that is, knew it before the global financial crisis, more than a decade ago – until we get back to reasonably strong annual improvement in the productivity of labour.

But the plain fact is, you’ve got to have a functioning economy before you can worry about how fast its productivity is improving. So there’ll be a time to debate which policies would or wouldn't do most to enhance productivity, but we have more pressing matters to attend to.

Some in the don’t-waste-the-crisis party can be forgiven because they’re under 50 and have no memory of what happens in recessions. But as my colleague Shane Wright has said, most of them are "the usual suspects, falling back on their usual agendas".

They have no genuine concern about the economy’s present life-threatened state, but are business people engaged in rent-seeking, or economists running off faith in their economic model, whether or not it’s supported by empirical evidence their theory actually works.

These urgers have forgotten that micro-economic reform seeks to increase economic growth by making the supply (production) side of the economy work more efficiently. It delivers results only over the medium to long term. It’s thus no substitute for macro-economic management, which deals with managing the demand side of the economy in the short term.

Right now, the prospect of a 10 per cent unemployment rate tells us we have more supply than we’re able to use. Clearly, our problem’s that demand is insufficient. The improvement in economic efficiency we assume we could gain by, say, taxing land rather than the transfer of it, is minor compared with the monumental inefficiency we know for certain is occurring because 10 per cent of our workers can’t find work. Macro inefficiency always trumps micro inefficiency.

Right now, we don’t even have an economy that’s functioning, much less functioning well. Much of it’s closed - locked up by government decree. We’re starting to ease the lockdown, but we won’t be opening our borders for another year or two.

When we do have most of the lockdown removed, what will we see? The economy won’t snap back. Not even bounce back in any significant way. True, once businesses are allowed to reopen they’ll be making some sales rather than next to none. But with so many households unemployed, sales won’t go back to anything like where they were.

Most households and businesses will be in cost-cutting mode. Firms have been incurring overheads while earning little. Even those households still working will be worried about their big mortgages and fearful of losing their own jobs. As Treasury secretary Dr Steven Kennedy has warned, “some jobs and businesses will have been lost permanently”.

Most firms and households will be getting back to some semblance of normality, but few will be doing much that causes the economy to grow in any positive sense. As Reserve Bank governor Dr Philip Lowe has said, firms and households are suffering from a "high level of uncertainty about the future" and will engage in "precautionary behaviour". They’ll be saving not spending.

Sound like a bounce-back, or an economy still in the intensive care unit? Ask yourself this: which are the forces that will propel the economy forward? It won’t be the main factor we’ve relied on in recent years – high immigration. Our population’s now falling, as people on temporary visas are sent home and not replaced. (Not that population growth does anything much to lift income per person.)

It won’t be “external stimulus” because the rest of the world is growing faster than us (it isn’t), or a lower dollar is making our exports cheaper to foreigners because we’ll continue banning foreign tourists and overseas students. Export commodity prices aren’t rising.

It won’t be growth in real wages (employers will compulsively demand a wage freeze) nor a "wealth effect" from rising house prices prompting households to cut their rate of saving. And a key missing piece: it won’t be big cuts in interest rates to encourage borrowing and spending.

That leaves only "fiscal stimulus" – the budget. The huge government spending so far has merely limited the extent of the economy’s fall. Should Scott Morrison soon start winding it back as he says he plans to, we could fall even further.

No, if we're to actually recover what will come next is a lot more government spending, particularly on useful projects. It can only be a government-led recovery.

Read more >>

After the anti-social lockdown comes the anti-jobs recession

Until now, old farts like me have thought it a terrible thing that next to no one under 50 has any experience of how terrible recessions are. Even ABC guru Dr Norman Swan sees the costs of the lockdown as mainly social: the boredom, loneliness, anxiety, depression, suicide and domestic violence. Really? That’s as bad as it gets, eh?

But at least our lack of herd immunity from unrealistic expectations means only us old-timers will be expecting this recession to be pretty much the same as those we experienced in the early 1990s, the early ’80s and the mid-1970s. That’s good because this recession will be markedly different to any of those.

Usually, recessions happen because of governments’ policy error. Their attention wanders while the economy is speeding down the road, but then they realise how high inflation’s getting and they panic. They jam on the interest-rate brakes but hit them too hard for too long, and the economy ends up careering off the road and hitting a tree, with many people losing their jobs.

That’s why former prime minister Paul Keating said our last major recession was “the recession we had to have”. He was trying to conceal the truth that all recessions happen by accident.

Until now. Uniquely, this recession has happened because of a knowing act of government policy. It’s “the recession the medicos said we had to have” as the only way to stop the virus killing people.

As we’re about to discover, it’s a huge price to pay. And a month or two cooped up at home is the least of it. Many of those people who’ve lost their jobs will still be cooped up at home many months after the rest of us have resumed normal lives.

And let me tell you, being unemployed for months on end also has adverse social consequences: feelings of anxiety, inferiority and worthlessness, depression, suicidal thoughts, money worries that lead to marital conflict, breakups and violence.

It’s because this recession is happening by government decree – by the government ordering many industries to cease trading – that it will be so much bigger than usual. Usually, economies slow for months before they stop; this time, most industries stopped on pretty much the same day. (Not to mention that the same thing has happened around the world to the countries that buy our exports.)

This recession will be so big and bad that not even the official always-look-on-the-bright-side brigade is trying to gild the lily. Reserve Bank governor Dr Philip Lowe said last week the recession would be a “once in a lifetime event”.

“Over the first half of 2020, we are likely to experience the biggest contraction in national output and income we have witnessed since [the Great Depression of] the 1930s,” he warned.

More specifically, his best guess was that real gross domestic product would fall by about 10 per cent over the first half of this year, with most of that in June quarter. The unemployment rate is likely to have doubled to about 10 per cent by June, though the total hours worked in the economy is likely to fall by much more than that would suggest: about 20 per cent (because many of those on the JobKeeper payment won’t be working much, but won’t be counted as unemployed).

Preliminary figures from the Australian Bureau of Statistics show that employment fell by about 780,000 people over the three weeks to April 4. And so far, 3.3 million workers are covered by JobKeeper.

This week, Treasury Secretary Dr Steven Kennedy said that whereas unemployment rose to higher levels than this in the Great Depression [to 20 per cent], it did so over the course of a couple of years, compared with just a couple of months this time. “We have never seen an economic shock of this speed, magnitude and shape, reflecting that this is both a significant supply [shock] and demand shock,” he said.

The shock to supply comes from the government closing our borders to foreign tourists and overseas students, and ordering so many industries to cease supplying goods and services to their customers. The shock to demand comes from the loss of wages to workers laid off, the loss of profits to firms unable to sell their products, and the loss of confidence that spending big by households and firms at this time sounds like a good idea.

But the differences between this coronacession and previous recessions don’t stop there. As we’ve seen, recessions are usually preceded by booms. Not this time. Former top econocrat Dr Mike Keating has noted that our economy was performing very poorly for some years before the virus hit.

“Over the three years . . . to December 2019, real GDP growth averaged only 2.3 per cent, business investment was flat, labour productivity did not increase at all and real wages averaged only a 0.4 per cent annual rate of increase,” he says.

One thing this means is that whereas the fall in real incomes caused by a recession usually reverses only some of the strong growth in incomes during the preceding boom, this time the fall in incomes will be a much bigger setback.

Yet another difference this time is that, whereas the Reserve Bank responds to a recession by using its “monetary policy” to slash interest rates and impart a big stimulus to borrowing and spending, this time rates are already so low it’s been able to cut them by a mere 0.25 per cent before reaching its effective zero bound.

During the global financial crisis in 2008, it cut the official interest rate by 4 percentage points in five months. So the budget – “fiscal policy” - is the only instrument the government has to respond to the recession.

There is, however, one important respect in which this recession will resemble all others: unemployment shoots up a lot faster than it comes back down. I’d be sceptical of any happy talk about the economy bouncing back. Crawling back, more likely.

Read more >>

Morrison and the medicos must also avoid complacency

They say Australians always respond well to a crisis, and it seems it's true. Even in these days of disposable leaders, Kevin Rudd deftly stopped the global financial crisis from sucking us into the Great Recession, and now Scott Morrison has got on top of the corona crisis in a way few would have expected. His approval rating has soared. But I still wouldn't want to be in his shoes.

Why not? Because, as an old econocrat explained to me long ago, if you dispose of a crisis with too much ease – without a titanic struggle – you get precious little gratitude from the voters. If it was that easy to fix, it can't have been much of a crisis in the first place. Indeed, all that money you spent – well, most of it must have been a waste. That's the very way his political opponents have sought unceasingly to denigrate Rudd's unbelievably skilled performance in 2009.

And now Morrison faces the same risk. Everyone's saying he – along with the premier cats he's been herding – has done surprisingly well in controlling the outbreak. But that's not true. The unvarnished truth is that – if you'll forgive the expression – he hasn't just done well, he's killed it. He set out merely to "flatten the curve" but in fact has driven it down almost to zero. And done so with just 80 or so people losing their lives so far.

In the jargon of the epidemiologists, he and the premiers have succeeded in getting "R" – the average number of other people infected by someone who's contracted it - below 1, meaning it's dying out.

Utterly uncharacteristically for a politician of any stripe, Morrison has sought to play down this achievement. Why? Because the whole world has a year or years to go before the virus is tamed and, in the interim, some mishap on our part could cause the virus inside our borders to become undead.

That's why Morrison and his medico advisers live in fear that any loosening of the lockdown could lead us to become "complacent" and flip to the opposite extreme, stopping all social distancing.

But keeping us locked down as tight as possible for as long as possible offers no solution to Morrison's challenge as our leader. That's because, though we care deeply about saving lives, we also care about saving our livelihoods. Our success in getting on top of the virus has been bought at the cost of shutting down most of the economy, with hundreds of thousands of workers losing their jobs.

Morrison's problem is that, because it was so relatively painless, his remarkable success in driving out the virus will soon be forgotten, whereas the continued dysfunctional state of the economy – the way-high unemployment – will be upmost in people's minds come the election in 2022.

And, even now, his critics – mostly from his own side – are concluding that his measures to deal with the virus grossly overestimated the size of the problem and have decimated the economy for no good reason.

For instance, we were terribly worried about the risk of hospitals being overwhelmed by patients who couldn't get proper treatment to prevent them from dying. We had to delay the virus' spread while we more than doubled the existing number of 2200 intensive care beds. Fine. Last time I looked, there were 43 virus victims in ICU.

But such criticism is just being wise after the event. It forgets that we had to respond quickly and forcefully to a new virus, the characteristics of which we knew next to nothing about. The best we had to go on were numbers from China, which proved much worse than our own experience.

The medicos' original modelling assumed Wuhan's R – reproduction number – of 2.68, whereas their more recent modelling using Australian numbers shows we started with Rs above 1 only in Victoria and NSW, before falling below 1 in all states bar Tasmania.

Morrison's deeper problem is that the longer he keeps the economy locked down, the less there will be left to reopen. So avoiding complacency cuts both ways. You and I must not become complacent about hygiene and social distancing, but Morrison and his medicos must not be complacent about the enormous economic (and social) cost that our success in getting on top of the virus is inflicting on all of us.

The solution is to take advantage of our success in taming the virus by moving quickly to replace the sledgehammer measure of closing down most of the economy with the less economically damaging measures of much more testing, better tracing of people exposed to the virus, and jumping on any local outbreaks ASAP. The new app is a big part of this shift to less invasive cures for the disease.

These are the three things Morrison has been quietly saying we need to get organised before we consider easing the lockdown. But now he needs to move strongly in dismantling much of it while, naturally, retaining our closed borders.

Read more >>

How would Jesus treat people on the dole?

Since it’s Easter, let me tell you about something that’s long puzzled me: how can an out-and-proud Pentecostalist such as Prime Minister Scott Morrison be leading the most un-Christian government I can remember? Fortunately, however, the virus crisis seems to be bringing out his more caring side.

Many people think being a Christian means being obsessed with sexual matters - abortion, homosexuality and same-sex marriage – plus, these days, their human right to discriminate against people who don’t share their sexual taboos.

But if you read the four gospels recording what Jesus did and said, one message you get is one rarely emphasised by his modern-day, generally better-off followers. Jesus was always on about the plight of the poor, and was surprisingly tough on the rich.

Jesus gave his followers a new commandment, that they love one another. “By this everyone will know that you are my disciples.” Asked who was the neighbour we should love as our self, he told the parable of a despised Samaritan, who rescued a man bleeding in a ditch while two upright church-goers “passed by on the other side”.

Jesus said he came to “proclaim the good news to the poor”. “Blessed are you who are poor, for yours is the kingdom of God. Blessed are you who hunger now, for you will be satisfied. . . But woe to you who are rich, for you have already received your comfort.”

To the rich he advised: “When you give a banquet, invite the poor, the crippled, the lame, the blind, and you will be blessed.”

Jesus blessed those who had been kind to others: “I was hungry and you gave me food, I was thirsty and you gave me something to drink, I was a stranger and you welcomed me, I was naked and you gave me clothing, I was sick and you took care of me, I was in prison and you visited me.”

When a young man asked Jesus what he must do to inherit eternal life, he said: “Go, sell what you own, and give the money to the poor, and you will have treasure in heaven; then come, follow me.” But the young man “was shocked, and went away grieving, for he had many possessions”.

All this compares badly with the actions of the Coalition government, in which Morrison has always played a senior role. As minister for immigration, he was more ruthless than Labor in turning away strangers who came by boat seeking asylum. Those who did make it were treated harshly, to ensure any further strangers got the message about how unwelcome they’d be.

A lot of people like to divide the poor between the deserving and the undeserving. Like Labor before it, the Coalition has pandered to this un-Christian attitude. It favours “lifters” over “leaners”. Morrison himself introduced the ethical code that only those judged to have “had a go” will “get a go”.

The deserving poor are people on the age pension; the undeserving are the unemployed, single parents and probably most of those claiming the disability support pension. I went out and found a job; what’s stopping them doing the same except their own laziness?

Labor always pandered to the widespread “downward envy” of the jobless, but the Coalition has doubled down, reintroducing work for the dole despite all the reports saying it does nothing to improve people’s employability, making people run down their savings and wait longer to be eligible for the dole, making people prove they’ve approached an unreasonable number of employers each fortnight and suspending their payment if they fail, or miss an appointment for any reason. Not to mention the "robo-debt" scandal.

The Coalition wants to control how people spend the dole by paying them by card rather than cash. It wants regular drug testing of those on the dole. And it has steadfastly resisted widespread public pressure to increase the paltry amount of the dole, even though Labor has finally been shamed into abandoning its own longstanding hardheartedness.

But now, however, having adopted the slogan “we’re all in this together” – one beloved of my co-religionists in the Salvos - in his battle against the virus, Morrison seems to have had a change of heart. Whereas Kevin Rudd studiously avoided including the unemployed in his two cash splashes, Morrison has included them with other welfare recipients in his two $750 payments.

His temporary “coronavirus supplement” effectively doubles the rate of unemployment benefits to about $550 a week. He must know that returning the dole to $40 a day after six months won’t be politically possible. Meanwhile, his temporary JobKeeper payment of a flat $750 a week undercompensates higher wage earners while overcompensating lower wage earners, including many casuals.

In all, a Christlike turn for the good.

Read more >>

Some major contagions have nothing to do with you-know-what

It’s a long weekend so, though we’re barred from enjoying it in the usual way, let’s at least forget the V-word. How about a quiz?

Let’s say the government is preparing for the outbreak of an unusual disease (no, not that kind of disease) that, should we take no action, is expected to kill 600 people. The government could act to combat the disease in either of two ways.

If program A is adopted, 200 people will be saved. If program B is adopted, there’s a one-third chance that 600 people will be saved, and a two-thirds chance that no one will be saved. Which one would you choose?

If you chose A, congradulations. You’re in good company. When this psychology experiment is run, about 72 per cent of subjects favour A and only 28 per cent favour B.

But then the government consults the epidemiologists. Their advice is: forget A and B, and consider program C or program D. If C is adopted, 400 people will die. If program D is adopted, there’s a one-third chance no one will die and a two-thirds chance that 600 will die. Which one would you choose?

If you chose D, more applause. In laboratory experiments, that’s what 78 per cent of subjects choose, leaving only 22 per cent choosing C.

But if you look at the four options again you find that program A and program C are the same. Under A, 200 out of 600 are saved; under C, 400 out of 600 die. It’s just that A highlights the positive, whereas C highlights the negative.

That 72 per cent of subjects favoured A, but only 22 per cent favoured C tells that most of us instinctively favour the safer, more certain outcome. Program B, remember, contained a two-thirds chance that no one would be saved. This instinctive preference confirms economists’ conventional assumption that most people are “risk-averse”.

But a closer look also reveals that program B and program D are the same. Program B offers a one-third chance that 600 people will be saved and a two-thirds chance that no one will be saved, whereas program D offers a one-third chance no one will die and a two-thirds chance that 600 will die.

(If you can’t see that, remember that, in probability theory, the expected outcome is the possible outcome multiplied by the probability of it happening. So B is ⅓(600) + ⅔(0) = 200. And D is ⅓(600) + ⅔(0) = 200.)

But if options B and D are the same thing expressed in different ways, how come the experiments show only 28 per cent of subjects choosing B, but 78 per cent choosing D? It’s because, relative to option C, which offered only the certainty that 400 people would die, option D offered a one-third chance that no one would die, and most subjects thought that was a risk worth taking.

This shows that, while it’s generally true that most people are risk-averse, as conventional economics assumes, a more powerful human characteristic – which conventional economics ignores – is that most of us are “loss-averse”.

A key insight of behavioural economics is that we hate losing something much more than we love gaining something of the same value. So much so that, surprisingly, we’re willing to run risks to avoid any loss.

If you hadn’t noticed, when you look closely you see that all four options offered the same “expected value”: 200 people saved, 400 lost. If everyone had realised this at the time, they should have been equally divided between the options.

Why were we so sure that A and C were much more attractive that B and D? Well, one possibility is that most of us aren’t much good at maths. But the more important explanation is that we are heavily influenced by the way a proposition is presented to us – by the way it’s “framed”, as psychologists say. The same proposition can be packaged in a way we find attractive or repellent.

This, too, is a truth that conventional economics knows nothing of, but behavioural economics – the school of economic thought that uses psychology to throw light on economic issues – has brought to economists’ attention.

Putting it differently, the choices we make are heavily influenced by the context in which we make them. This is one of the key arguments advanced by Robert Frank, an economics professor at Cornell University, is his new book, Under the Influence.

Frank notes that standard economic theory says the spending decisions we make depend only on our incomes and relative prices. People’s assessments of their needs and wants are assumed to be completely independent of the spending decisions of others around them.

But this too is where the assumptions of standard theory are unrealistic. In real life, the things we buy and do are often heavily influenced by the “context” of what our friends are buying and doing.

We wear the clothes we think are fashionable, and we judge what’s fashionable by what our friends are wearing. The best way to predict whether a young person will take up smoking is whether their friends smoke.

We have an impulse to conform – which is stronger than we often realise. That’s why we can’t resist buying toilet paper when others are grabbing it, or selling our shares when others are quitting the market.

Psychologists call this phenomenon “behavioural contagion” – our tendency to mimic the behaviour of others. When some things start to become popular, they often become very popular. Same if they start becoming unpopular.

Frank notes that our tendency to copy what others are doing can have positive consequences (as when people exercise more because their friends are doing it) or negative consequences (as when we drink heavily because the people we live with are).

He argues that economists ought to be more conscious of behavioural contagion because of the opportunities they present for governments to use taxation to encourage us to make better choices.

Read more >>

For this to work, we must really be 'all in this together'

There are two ways Scott Morrison can play this coronacession: he can spread the pain as fairly as possible, or he can yield to all his political instincts and play favourites. You know: lifters get looked after, leaners take their chances. Those my tribe judge to be not "having a go" won’t be given a go.

Fortunately, Sunday’s second, $66-billion assistance package suggests Morrison’s trying hard to overcome his instincts, be more statesman-like and not exclude unpopular groups from assistance. He’s got further to go, however.

The poor are the biggest losers in every recession and that will be just as true in the coronacession. Those who are able to keep working will be the least affected; those who lose their jobs will be the most affected.

The strongest reason for Morrison to take steps to spread the pain more fairly is that it’s the right – you could almost say the Christian – thing to do. But he has extra, more pragmatic reasons for doing so. One is that it's easier to get everyone to cop their share of the burden – and to pull their weight – if they believe the burden’s being shared fairly. If they know that "we’re all in this together" is more than an empty slogan.

A special reason in this virus-induced recession is that if you leave the poor – the unemployed, the casual workers, the sick and the homeless – feeling ignored and excluded, you rob them of both the motivation and the financial and physical ability to play their part in not spreading the virus to others. If you’re not caring, they become the weak link in your efforts to lower the infection rate.

One fairness principle Morrison adopted from the start is to avoid assisting big business (with the exception of the airlines), but rather ask them to do the right thing by their employees and customers.

Despite the cheap money the banks are getting from the Reserve Bank, it’s clear they’ve gone further with their concessions to small business borrowers, people with mortgages and even term-depositors.

Their profits and shareholders will take a big hit – the first big hit since the recession of the early 1990s - which raises a broader fairness question: if you can’t afford to keep paying your workers, how can you afford to keep paying dividends?

For big businesses, including banks and energy retailers, to move against customers who get behind on their payments in the normal way would make this recession even deeper, and help no one – as the government seems to be making clear to them in private.

The same principle holds for landlords, even though these are mainly what you’d class as small businesses. Evicting tenants at a time like this gets you nowhere. No one gave landlords a guarantee that negatively geared property was one-way bet.

The second package has used a temporary "coronavirus supplement" to effectively double the Newstart allowance for six months. Good move. It’s also a tacit acknowledgement of the truth of the almost universal criticism that the present dole is impossible to live on.

At first the government thought to pay the higher allowance to newly unemployed people but not the existing jobless, but fortunately has thought better of the idea. Now it needs to make sure the infamous Centrelink (since renamed Services Australia – irony, I presume) understands its political masters no long require it to hassle people more than help them.

It would also help to avoid saying that those newly on the dole were there "through no fault of their own", thus implying that those already on it were there through some fault of their own.

The new package’s doubled cash-flow support payments to small and medium businesses should help keep more employees in jobs, though the use of payments based on employers’ remittances of their employees’ pay-as-you-go tax instalments (intended to prevent firms from taking the payment but dismissing the staff) is biased in favour of firms with highly paid (and taxed) employees and against those with poorly paid employees, including casuals.

Many firms will fall back on the new $20,000-over-six-months minimum rebate, which is unlikely to stop many low-paid and casual workers being let go.

A quarter of all employees are casuals, and adding the pseudo self-employed (including those in the "gig economy") takes to 37 per cent the proportion of workers who have no paid sick leave. The second package’s failure to improve on the earlier arrangement for those people to be eligible to apply for the little-used "sickness allowance" will leave many still tempted to keep working when they should be at home in bed.

And the failure of either package to do anything to help the homeless leaves a gaping hole in our efforts to protect their lives from the virus, or to slow its spread.

Read more >>

It's the coronacession: closing down on doctors' orders

It’s now clear that we – like most countries – are already in a recession that promises to be long and severe. It will be a recession unlike any we’ve previously experienced. Why? Because it’s happening under doctors’ orders. So it deserves a unique name: the coronacession.

It’s taken a few weeks for this to become obvious, mainly because economists don’t know much about epidemiology and it’s taken the nation’s medical experts until now to make clear that their preferred response to the virus will take months to work and involve closing down much of the economy.

We already know that real gross domestic product is likely to contract in the present March quarter and it’s now clear that last week’s $17.6 billion stimulus package is unlikely to fully counteract the fall in economic activity – production and consumption – during the imminent June quarter, brought about by the government’s measures to impose “social distancing” and encourage “self-isolation”.

Since the medical authorities are only now suggesting that these efforts to slow the spread of the virus may need to continue for six months – which, considering their bedside-manner efforts to break it to us gently, may well prove an underestimate – it won’t be surprising if the economy also contracts in September quarter.

Of course, Sunday’s further stimulus package has been designed to offset the loss of wages and profits that will arise from pretty much closing the economy down, but I’m sure the government and its econocrats realise we’re long past the stage of pretending that avoiding two successive quarters of “negative growth” means avoiding recession.

As Finance Minister Mathias Cormann now readily concedes, “businesses will close and Australians will lose their jobs”.

It’s the business closures, falling employment and rising unemployment and underemployment that characterise a recession – and are the reason why, in normal times, governments and central bankers try so hard to prevent them, not bring them about.

Once these developments fill the headlines, what happens to GDP each quarter will be of only academic interest.

To fill out Cormann’s cryptic description of what is coming, many businesses will close their doors – some temporarily, some for good - partly because the government has cut off their access to customers (the airlines, inbound tourism, sporting, arts and entertainment events) and also because it has encouraged people to stay at home, minimising travel, trips to supermarkets and shopping centres and visits to restaurants, pubs, cafes and coffee shops.

The many people working or studying from home can be expected to spend less than they normally would.

The nation’s income from exports will fall, particularly because of the government’s bans on the entry of foreign tourists and students. The recessions in other countries will reduce their demand for many of our other exports.

Of course, our recession will reduce our demand for imported goods and services (we won’t be taking overseas holidays for the foreseeable, for instance) and, in some cases, parts and goods we need to import won’t be available until Chinese factories are fully back to work and have caught up with their backlog.

As businesses find they have few or no customers, they will seek to wind back their activities, leading many to stand down staff or make them redundant. Casual workers will discover there are a lot fewer or no shifts for which their services are required.

So, fewer sales of goods and services lead to less production of goods and services, which leads to less work done, jobs lost and less income earned by workers, who then have less to spend, even on essentials such as rent and utility bills.

You see from all this that - although the virus came to us from overseas, and although so many other countries are in the same position as us that there’s a world recession - it’s not the rest of the world that’s dragging us down. No, it’s our decision to seek to minimise the number of deaths from the virus by slowing down its spread through the population, and doing so by closing down much of our economy for months on end.

As is their practice, our medicos have focused on saving lives and protecting our health, and haven’t worried too much about what their medicine would cost, or who’d be paying for it.

You and I will be paying the cost – with those who lose their jobs paying a mighty lot more than the rest of us – and it will be the responsibility of the government, advised by its econocrats, to do everything it can to minimise that cost and spread the burden fairly.

How? By spending big. How big? Not last week’s $17.6 billion, more like $176 billion. The second stimulus package we see on Sunday will be just another instalment.

This will blow the federal budget out of the water. It will be hit in two ways: not just by the extra spending and tax cuts the government chooses to make, but also by the simple fact that businesses and individuals who earn less income pay less income tax. Workers who lose their jobs not only cease paying any income tax, they have to be paid unemployment benefits.

But here’s the trick: the more the government skimps on the cost of cushioning the effects of its own decision to shut down much of the economy, the deeper and more protracted the recession will be and the longer it will take to get the economy back to running normally once the threat from the virus has passed.

Paradoxically, that means the more you skimp on the cost to the budget, the bigger the deficit you end up with, and the further off into the future the return to surplus becomes.

The measures announced on Thursday by the Reserve Bank, particularly the cheap funding to banks for loans to small businesses, will help a little, but the game is pretty much over for the Reserve and its “monetary policy”. From now on, everything turns on what Scott Morrison does with his budget.

Read more >>

At last we’ve been shown the virus game plan. Boring

I grew up in the Great Depression. Well, not really, but there were times when it certainly felt like it. The Depression was my father’s favourite topic of breakfast conversation and I got to hear a lot about it, particularly the questionable behaviour of someone called Jack Lang.

It wasn’t until long after my father had been "promoted to Glory", as the Salvos say, I learnt from my sisters that the Depression had been his finest hour. In those terrible times, a generous government made thousands of unemployed men trudge from town to town to be eligible for "the susso" – a woefully inadequate sustenance allowance, often paid in kind.

Men moving around the backblocks of Queensland soon learnt to come to the back door of my father’s Salvation Army quarters, where the captain would go to quite extraordinary lengths to help them along their way.

Now, I’m not for a moment implying that what we’re about to go through as we cope with the coronavirus bears any comparison with the Depression, which lasted for most of the 1930s and drove the rate of unemployment to reach 20 or 30 per cent.

No, I’m just saying this crisis will turn our lives on their head for so much of this year that we’ll remember it for the rest of our lives and won’t fail to tell our kids about it in years to come.

It’s clear that, after a few weeks of unthinking panic and silliness, we’ve reached the business end of the epidemic as "community transmission" – spreading of the disease between people who had no known contact with a confirmed case or who had arrived from a badly affected country – begins in earnest and the authorities get progressively tougher in imposing "social distancing" – slowing the spread of the virus by keeping people apart.

This is a steep learning curve for everyone: politicians, medical experts and even all-knowing journalists. But the road map of where we’re headed, what it involves and roughly how long it will last – say, six months – is now apparent.

The authorities faced a choice between letting the contagion rip – getting it over quickly, but with an overwhelmed health system, serious cases going untreated and too many oldies and medically compromised people dying – or trying to slow the spread so the health system copes and deaths are minimised.

Unsurprisingly, they chose to "flatten the curve", using self-quarantine of people who may have the disease or do have a mild case, self-isolation (staying at home to avoid contact with others) and social distancing – banning large gatherings, restricting travel, maybe closing schools, encouraging people to work from home, and urging people to minimise their contact with others.

While slowing the spread reduces the number of deaths, it’s by no means certain it will reduce the number of people contracting the disease. The big price to be paid is prolonging the disruption to people’s daily lives and, hence, to the economy. Less paid work will be done, many will earn less income, less money will be spent, and unemployment and underemployment will rise.

A less obvious price is that the extraordinary lengths we will be going to to limit deaths will leave many people fearing the virus is a much greater risk to their health than it is. The great majority of people who get it will suffer no worse than a bout of flu. But the fear may be a good thing if it makes the hale and hearty more diligent in their hand-washing and avoidance of social contact.

Have you realised what this means for most of us? We’re about to go though a period of weeks or months of staying at home and rarely going out. This is obvious for the elderly and health-impaired, but will also apply to those who have to work from home, those casual workers whose shifts are cancelled, school and uni students attending classes online, and parents who can’t work because they have kids to mind (and shouldn’t be asking old grandparents to help out).

As I contemplate it for myself (I’ll soon be off on five weeks’ staycation), a word springs to mind, starting with b and ending in -ing. Social work academics are writing papers about "cabin fever" – fever in more ways than one.

It won’t be lost on a lot of people that the arrival of pandemics – this may be the worst, but it’s not the first and won’t be the last – is an unwelcome consequence of the globalisation of the world economy.

Against that, however, the digital revolution has made it easier for many screen-based workers to work from home and for students to view lectures. Teleconferencing is a reasonable substitute for face-to-face meetings and interstate business trips. The range of home entertainment is a lot wider and of better quality since the advent of such things as streaming video. You may not be able to attend football matches, but you can still watch them on telly.

Mobile phones make it much easier to co-ordinate with family members, and Facebook lets you keep up with friends. And not forgetting that e-commerce lets you keep spending. Which will be nice. But it doesn’t change the fact that "social distancing" is contrary to all our instincts as social animals.

Read more >>

Avoiding the R-word won't be as easy as boosting June quarter

Sorry to be blunt, but anyone who thinks avoiding a second quarter of decline in real gross domestic product means avoiding recession needs a lesson in economics.

It’s clear that Scott Morrison’s $17.6 billion stimulus package – what you might call Kevin Rudd with Liberal characteristics – was aimed primarily at boosting economic activity in the June quarter. Fully $11 billion of the $17.6 billion will be spent or rebated from the budget during the quarter.

Half of that will come from the cash-flow rebates to employers, and most of the rest from the $750-a-throw cash splash to social welfare recipients (including parents receiving family payments).

Not all the cash will have been spent, of course, but our and other countries’ experience suggests a lot more will be than you may expect. Former prime minister Rudd’s two cash splashes in 2008 and 2009 are immediately apparent in the retail sales figures of the time.

In any case, to the possible $11 billion you have to add well over $4 billion worth of spending on cars, vans and equipment by small and medium-size businesses, induced by the temporary investment incentive, which will be spent before June 30 but won’t hit the budget until next financial year.

This helps explain why Treasury estimates that the stimulus package will add 1.5 percentage points to whatever other growth or contraction in real GDP we get in the June quarter. Since growth in a normal quarter would be about 0.5 per cent – and, for comparison, Treasury and the Reserve Bank have estimated that the coronavirus will subtract 0.5 percentage points from growth in the present March quarter – this suggests the package stands a good chance of stopping next quarter being a second successive quarter of "negative growth" – contraction.

So, recession avoided? No, all that would have been avoided is having the financial markets and the media running around like headless chooks, shouting the R-word – and so frightening the pants off the rest of the populace – just as it was avoided in the March quarter of 2009, after Rudd’s carefully timed second cash splash.

Let’s be clear. Just as it was exactly right for Rudd and his advisers to do everything they could to avoid a second successive quarter of contraction, so it’s exactly right for Morrison and his advisers to do the same. That’s not because the two-quarters rule makes any sense, it’s because so many silly people think it makes sense.

When you’re trying to head off – or at least minimise – a recession, what people think and feel (their animal spirits) matter as much as what they actually do, for the simple reason that what people think and feel – their "confidence" – ends up having so much influence over what they do.

(What a pity the epidemiologists don’t have the same tried-and-true template for responding to a virus outbreak that economists have for responding to the risk of recession.)

But what anyone who wants to be smarter than the average bear needs to know is that the two-quarters rule makes little sense. It’s no more than an arbitrary rule of thumb with no science behind it. It appeals to the simple souls in the financial markets and the media because it’s simple, objective and (the killer argument) involves minimum waiting.

Only trouble is, for a rule of thumb it doesn’t work well. As the independent economist Saul Eslake demonstrated some years ago, it throws out too many false negatives. That is, it can tell you we don’t have a recession when we do. For instance, two negative quarters separated by even a zero quarter tells you we’re home free. Really? How long will the punters swallow that?

But another problem is that it focuses on the wrong variable – production – when what we really care about is employment and unemployment. Dr David Gruen, now boss of the Australian Bureau of Statistics, once proposed the most watertight definition of recession: "A sustained period of either weak growth or falling real GDP, accompanied by a significant rise in the unemployment rate."

And Eslake has road-tested a different rule, showing it has produced no false signals. It defines recession as "any period during which the rate of unemployment rises by more than 1.5 percentage points in 12 months or less".

Guess what? In the nine months between September 2008 and June 2009, the rate of unemployment rose by 1.6 percentage points to a peak of 5.9 per cent, but then fell back to 5.1 per cent over the following year. So we did have a recession, but it was so short and mild the punters didn’t notice it.

And taming recession so successfully brought Labor no thanks at the ballot box.

Read more >>

Too soon to say how hard virus will hit economy

To judge by the gyrations of the world’s sharemarkets, the coronavirus has us either off to hell in a handcart or the markets are panicking about something bad that’s happening, but they’re not sure what’s happening, how long it will last or how bad it will end up being. I’d go with the latter.

So would Reserve Bank deputy governor Dr Guy Debelle. He said in a speech this week that there’s been a large increase in the financial markets’ "risk aversion and uncertainty".

"The virus is going to have a material economic impact but it is not clear how large that will be. That makes it difficult for the market to reprice financial assets," he said.

That’s central-bankerspeak for "they’ve got no idea what will happen". Which is hardly surprising, since no one else has, either. More from Debelle’s speech as we go.

But understand this. Farr’s law of epidemics, developed in the mid-19th century, says that the number of cases of a new disease rises and then falls in a roughly symmetrical pattern, approximating a bell-shaped curve.

Depending on how quickly the disease spreads, the bell can have a steep rise and fall or a shallow one. Epidemiologists seek to make the bell as shallow as possible by slowing the disease’s spread. This allows the health system to avoid being overwhelmed – reducing the likelihood of panic and chaos, and making it more likely those who most need medical attention get it.

In theory, it allows more time for the development of a vaccine or useful drugs, but the World Health Organisation has said it will take about 18 months for a coronavirus vaccine to be widely available.

At this stage, the main way of slowing the spread is "social distancing" – reducing the contact between people by cancelling sporting events, closing schools or workplaces or ordering people to work at home. Of course, many people are doing their own social distancing by staying away from restaurants and bars.

The virus has now arrived in most countries. Its spread is well advanced in China, Iran, Italy and South Korea, but much less so in Singapore and Hong Kong, where the authorities got in earlier with their social distancing measures.

Such measures, however, cause considerable inconvenience, especially to parents, and disruption to the economy – both to the production of goods and, more particularly, services, and to their purchase and consumption. Not to mention the associated loss of income.

Some of this economic activity may merely be postponed – so that there’s a big catch-up once the epidemic subsides. But much of it – particularly the performance of services (if you miss a restaurant meal or a haircut you don’t catch up by having two) – will be lost forever.

Obviously, China is central to the story for both the world economy and ours. China’s economy was hit hard by the virus and the drastic but belated measures to slow its spread, though the number of cases does seem to have passed its peak and rapidly declined. Debelle said "the Chinese economy is now only gradually returning to normal. Even as this occurs, it is very uncertain how long it will take to repair the severe disruption to supply chains."

The globalisation of the world economy in recent decades is a major part of the story of this virus. It means people in any part of the world are almost instantly informed about unusual things happening anywhere else in the world. It’s good to be better informed, but sometimes it can be frightening.

For another thing, globalisation has greatly increased the trade between countries, particularly trade in services, such as tourism and education. Trade in services has been greatly facilitated by the emergence of cheap air travel.

It’s all the overseas air travel everyone does these days that has caused epidemics that break out in one part of the world to spread around the world within a few weeks. More pandemics has become one of the big downsides of globalisation.

And when governments try to limit the spread of a virus by banning the entry of people from countries where the virus is known to have spread widely, this disrupts and damages those of that country’s industries who sell their services to foreign visitors.

(When the government stops you supplying a service to willing buyers, economists classify this as a shock to the "supply side" of the economy. When your sales fall because customers become more reluctant to buy whatever you’re selling, that’s a "demand-side shock" to the economy.)

Our imposition of a ban on non-residents entering Australia from China has hit our tourism industry and our universities. Debelle said that, since January, inbound airline capacity from China has fallen by 90 per cent. Until recently, he said, tourist arrivals from other countries had held up reasonably well, "but that may no longer be true".

The Reserve estimates that Australia’s services exports will decline by at least 10 per cent in the March quarter, roughly evenly split between tourism and education. Since services exports account for 5 per cent of gross domestic product, this suggests the travel ban will subtract 0.5 percentage points from whatever growth comes from other parts of the economy during the quarter.

Another consequence of growing globalisation is the emergence of "global supply chains" – the practice of multinational companies manufacturing the components of their products in different countries, before assembling them in one developing country and exporting them around the world.

China is at the heart of the supply chains for many products. So Debelle’s remark about the delay in repairing "the severe disruption to supply chains" is ominous. The Reserve’s business contacts tell it supply chain disruptions are already affecting the construction and retail industries – but there’s sure to be more of this "supply-side shock" to come.

And the shock to demand as - whether through virus-avoidance, necessity or uncertainty - consumers avoid spending money, has a long way to run. But, Debelle said, it’s "just too uncertain to assess the impact of the virus beyond the March quarter".

Read more >>

Morrison's trickle-down stimulus may not be enough

I hope I’m wrong, but I doubt if Scott Morrison’s $17.6 billion stimulus package is big enough to stop the temporary shock of the coronavirus outbreak becoming a longer-lasting blow to the economy.

We live in an economy that produces goods and services worth $2 trillion a year. To have a significant impact on the economy we needed measures worth at least 1 per cent of that – about $20 billion in their first year.

To be fair, the package is much bigger than earlier envisaged, but “a touch less than 1 per cent” isn’t as comforting as well over 1 per cent. It’s clear the measures in the package have been carefully designed – Treasury’s fingerprints are everywhere – and Morrison keeps saying it’s “scalable”: it can be added to. Maybe he’s already intending to top it up.

Treasury’s famous advice to former prime minister Kevin Rudd during the global financial crisis in 2008 was “go hard, go early, go households”. That advice is as good today as it was then. Morrison and his Coalition colleagues have spent the past decade finding fault with Rudd’s stimulus but, as the prominent economist Chris Richardson has said, “it worked”.

Apart from not going hard enough, Morrison’s package is – for reasons easy to guess at - half-hearted about “going households” – that is, sending cash direct to households in the hope of making them less worried about their debts and getting them to spend in the shops.

Morrison’s allegedly nothing-like-Labor’s cash splash is $750 a throw, but limited to welfare recipients. Since retailers were doing it tough even before the virus, it should have gone to all low and middle income-earners.

A special feature of the virus “challenge” (as the spin-doctors prefer to put it) will be the need for workers to stay home – and the temptation for the quarter of them not covered by sick leave to keep working and earning when they shouldn’t.

Morrison’s solution is to waive the delay period once casual workers have jumped through all Centrelink’s hoops and applied for the little-used “sickness allowance”. Much easier and more effective to have included them in the cash splash.

Rather than the direct approach of a bigger cash splash, Morrison has favoured the trickle-down approach: he gives cash rebates to small and medium businesses, intended to discourage them from laying off workers if the virus disruption means they don’t have much work to do.

(Big businesses have been incentivised with an appeal to their patriotism. How this works if they are foreign-owned – like the Big Singaporean, BHP - I’m not sure.)

A praise-worthy effort to protect the jobs of the nation’s 120,000 apprentices and services-sector trainees has been included.

The temporary expansion of the instant asset write-off for smaller businesses should have some success in encouraging them to spend on new cars, trucks and equipment before June 30, despite the less-than-booming demand for their products. Of course, this will mainly draw forward spending that now won’t occur over the next year or two.

But the real money - $6.7 billion - will be spent on a temporary scheme to improve the cash flow by between $2000 and $25,000 of small to medium businesses that keep their staff on this year.

Trouble is, much of that money will go to businesses that had no intention of letting their skilled (and thus well-paid) workers go, whereas many small businesses whose workers are unskilled and badly paid (and thus more likely to be let go) won’t be entitled to anything more than the minimum $2000 rebate.

Read more >>

It will take time to get used to living with the new virus

The coronavirus is deadly – it will end up killing quite a few oldies – but we (and the rest of the world) are making so much fuss about it mainly because it’s new. Thanks to that fuss, it’s likely to do more damage to the economy than it does to life and limb.

How much damage we do to the economy – and whether it lasts a few months or a few years – will be determined largely by the way Scott Morrison and his ministers manage all the fuss: on the medical side and the economic side.

There’s one sound medical reason for being concerned about the newness of this particular virus: as yet, we have no natural immunity to it. But don’t worry, we’ll get it in due course – although we’ll have calmed down long before that. The “novel coronavirus”, as the medicos call it, will have lost its novelty in a different sense.

The news media are making a great fuss for no reason other than the virus’ newness. New is what news is about. What’s new is unknown and what’s unknown is frightening.

You may think we’re making all this fuss not because the virus is new, but because it’s deadly. But we have daily contact with a lot of deadly things we don’t make a fuss about because we’re used to them.

It could be that road accidents cause more deaths – and certainly more injury – than the virus does this year. And seasonal flu carries off a lot of oldies every year without much fuss. In the end, Sydneysiders decided that the death and injury caused by late-night drinking wasn’t a good enough reason to limit the fun.

One key group who are understandably worried about the virus because of its newness are doctors and other health and aged-care workers. It does matter more if someone in such intense contact with the elderly and the ill gets the virus than if I get it.

But what’s worrying the doctors is how little we yet know about the characteristics of the virus and, more particularly, how little they’ve been told about what to do. Where are the protocols on how to handle patients who present with symptoms? What about face masks and testing kits?

Our surgery or hospital or old people’s home is already stretched, how will we cope with the influx? What will we do if we have to send key workers home for a fortnight because they’ve caught it or may have caught it?

I’m sorry to disillusion you if you haven’t worked it out yet, but the health authorities aren’t trying to stop the spread of the virus. They’re not trying to nip it in bud or stop it in its tracks. The cat’s out of the bag and it’s too late for that.

So what are they trying to do? Just slow down its spread. Why? To give the medical and aged care system time to prepare for the onslaught – including the time to set up separate “fever assessment clinics” where the “worried well” are kept away from those likely to have caught the virus, and away from those known to have.

As the disease spreads to many more people, it won’t be possible to put lots of medical time into tracing the contacts of every particular carrier – nor close a school for a few days while you do it. That is, in the best sense, a delaying tactic.

As Dr Katherine Gibney, of Melbourne’s Peter Doherty Institute for Infection and Immunity, and others, explain on the universities’ The Conversation website, as case numbers rise, case management will need to be streamlined. “While many mild cases have been admitted to hospital during the containment phase, community-based care [that is, staying at home] will be the reality for most people,” they say.

Australia’s Chief Medical Officer, Professor Brendan Murphy, says travel bans are only a way to slow down the spread of the virus. “It is no longer possible” to prevent new cases entering Australia, he says. This suggests that, before long, the border measures will be relaxed.

Last week the NSW Chief Health Officer, Dr Kerry Chant, was blunt: “We are not going to be able to contain this virus.”

Gibney and colleagues say “it’s likely, but not certain, that COVID-19 will remain in circulation beyond 2020 and become ‘endemic’ in Australia – that is, here for good” – like many viruses before it, including seasonal flu. Last season almost 300,000 cases of flu were reported, with 810 deaths – a fatality rate of about 0.27 per cent.

As yet, figures for the coronavirus are preliminary but it’s thought to be much more deadly than the flu, with a fatality rate of 1 or 2 per cent. It’s also more contagious than the flu, though much less so than measles. Its incubation period of two to 14 days is three times longer.

Even so, about 80 per cent of those who get it have a mild to moderate illness and only 20 per cent have a severe to critical illness. Most people who aren’t elderly and don’t have underlying health conditions won’t become critically ill.

Disruption to the economy is unavoidable, but the danger is that hour-by-hour reporting of efforts to slow the spread is frightening a lot of people and will lead them to overreact to the risk of infection, closing businesses and purses and making everything worse than it needs to be.

Read more >>

Back in Black one minute, loose talk of recession the next

For most of last year, people kept asking me if our slowing economy was headed for recession. I always replied that we weren’t, but that our chronic weakness left us exposed to any adverse shock.

Turns out we’ve been hit by two. According to Treasury’s estimates, the bushfires will subtract 0.2 percentage points from whatever growth we get from other sources in the present March quarter, and the response to the coronavirus outbreak will subtract a further “at least 0.5 percentage points”.

With just three weeks of March quarter left to run, it’s clear the coronavirus response will also subtract from growth in the June quarter. By how much? Showing better judgment and greater experience than his political masters, Treasury secretary Dr Steven Kennedy told Senate Estimates on Thursday that it would be “unhelpful” to speculate. True.

Had he been paying attention – or just been willing to meet the former fire chiefs – Scott Morrison had plenty of reason to expect a bad, economy-damaging bushfire season, but he asks us to put up our hand if we expected the coronavirus. A neat rhetorical trick but, from the leader of a party claiming to be good at managing the economy, not good enough.

The risk of the economy being hit by shocks (good or bad) is always present. We could have had a terrible cyclone up north – or more than one. The US-China trade war could have escalated. And this isn’t the first virus to spread around the world.

Consider this. If you were to contract the coronavirus, in what physical state would you prefer to be at the time – in good health or poor health? It’s the same with economies. The stronger the economy is when the adverse shock hits, the easier it is to contain the disruption and get back on track.

Point is, good economic managers don’t allow the economy to get so weak that, should it be hit by a serious shock, recovery from that shock would be much harder and the risk of it turning into an actual recession much greater.

This helps explain why Reserve Bank governor Dr Philip Lowe has been urging Morrison to use the budget to strengthen the economy for several years, backed up by the International Monetary Fund, the Organisation for Economic Co-operation and Development and many of the nation’s macro-economists.

But no, our headstrong Prime Minister knew better. If he wasn’t prepared to take advice from fire chiefs and climate scientists, why would he listen to economists on a subject which, being a Liberal, he already knew all he needed to know: despite its weakness, the economy can take its chances while we get the budget Back in Black. That will leave us better-placed to respond to a recession once it’s upon us.

Turns out it took the medicos to bring him to his senses. Impose travel bans that decimate most of our services export industries? Yes, doctor, certainly, doctor. So now we’re doing what we said only spendthrift, Keynes-crazed Labor governments do: spending money and, more particularly, cutting tax receipts, to offset the damage the travel bans are doing.

Since the return to surplus is no more, we could use the opportunity to give the economy a much wider stimulus – put money directly into the hands of consumers, for instance – but no. It seems Morrison is still hoping a quick recovery from the virus shock will have the budget back to surplus in time for the next election.

Really? This is where his amateurism is still showing. In principle, the virus is, as Kennedy says, no more than a “short-term shock” from which the economy soon bounces backs. And that’s the right objective for fiscal (budget) policy.

But if that’s your objective, you don’t brief political journalists in ways that encourage them to inform their audience that two successive quarters of contraction in real GDP are likely, which – as God ordained, and every fool knows – equals a recession. Even the usual weasel-word “technical” is missing from these confident assertions.

What’s missing from the government’s – but, if you read them carefully, not its econocrats’ – thinking is an understanding that managing the confidence and expectations of consumers and businesses is half the battle. Animal spirits, as some unmentionable economist once put it.

If you’re trying to ensure that a short-term shock doesn’t become a lasting recession, you don’t encourage the media to make free with the R-word, even though it does help you cover your embarrassment at having claimed we were Back in Black when we weren’t, and now aren’t likely to be for ages.

When is a temporary economic shock a recession? When you listen to your political spin doctors, but not your econocrats.

Read more >>

Coronavirus will hit an economy that’s already weak

It’s good to know the economy wasn’t as weak as we’d been told, but it’s not nearly good enough. Not when we know it’s getting walloped this quarter by the bushfires and the coronavirus.

This time three months ago, we were told that real gross domestic product had grown by just 1.7 per cent over the year to September. This week the Australian Bureau of Statistics announced that real GDP grew by 0.5 per cent during the December quarter and by 2.2 per cent over the calendar year.

On the face of it, this was the “gentle turning point” long promised by Reserve Bank governor Dr Philip Lowe. But when you look behind the headline numbers, it’s clear the economy’s basic problems continued unchanged.

Households are the bedrock of every economy, with consumer spending accounting for more than 60 per cent of total spending (aka “aggregate demand”). Obviously, households spend out of their income after paying income tax – their “disposable” income.

The greatest single factor driving household disposable income is income from wages. We know that employment has long been growing surprisingly strongly, so the income from the extra jobs is adding to household income.

But the main growth in wage income comes from pay rises. And we also know that, for five or six years now, wage rises haven’t been much bigger than the rises in the prices consumers pay. So if “real” wages aren’t growing strongly, it’s hard to see how real GDP – aggregate demand – can be growing strongly. Not in any sustainable way.

The full story is more complicated than that, of course, but that’s what an economist would call the “underlying” reality. So until strong growth in real wages returns, we’ll be spending our time examining the ups and downs in all the other, complicating factors that, over the short- to medium-term, cause the growth in real GDP to be a bit stronger or a bit weaker than the real growth in wages would lead us to expect.

(Should real wages never seem to return to the growth rate we were used to, we’d have to reassess our notions of what constitutes “strong” and “weak” growth – but that’s a story for another day.)

Back to the complications. Consumer spending grew by 0.4 per cent during the December quarter, which was a big improvement on its growth of 0.1 per cent in the previous quarter, but growth of 1.2 per cent over the year is less than half what it should be.

Much household spending goes on housing – whether renting or buying. And when people change houses they tend to have a burst of spending on “consumer durables” such as new furniture and appliances.

The buying and selling of existing homes doesn’t generate much economic activity, except to increase real estate agents’ commissions (and you’ll be delighted to hear that the increase in home sales, which is both a cause and an effect of the renewed rise in house prices in Sydney and Melbourne, caused such a boost in those commissions that it accounted for 0.2 percentage points of the overall increase of 0.5 per cent in GDP during the quarter).

But what does form a big part of GDP is investment in the building of new houses and units, plus alterations and additions. Here the news was not good. Home building activity fell by 3.4 per during the quarter and by 9.7 per cent over the year. It was the fifth quarter of contraction in a row.

Directly or indirectly, investment by businesses in new buildings, constructions and equipment is aimed at satisfying the expected demand for goods and services by households (although, when those households live overseas, we call it demand for exports).

So if consumers’ demand for goods and services has been weak for quite a few years, it’s not surprising that businesses’ investment spending on expanding their production capacity has also been weak. Although our miners have resumed investment, investment by the non-mining sector fell. Overall, business investment spending fell by 0.8 per cent during the quarter.

Put those three things together – consumer spending, new housing investment and business investment – and you’ve got the total demand of the private sector. It showed no growth during the quarter, and its annual contribution to overall GDP growth over the past few years has now fallen to zero.

So where is the growth coming from? From spending by the public sector. In previous quarters this has included strong growth in spending on infrastructure (mainly by the state governments), but this quarter it fell a bit. That left government spending on the provision of services (particularly on the federal rollout of the National Disability Insurance Scheme) growing by 0.7 per cent during the quarter and by 5.3 per cent over the year.

Now do you understand why governor Lowe keeps banging on about the need for governments to spend up?

The second factor helping to keep us growing is the “external sector” – specifically “net exports” (exports minus imports). The volume of exports of goods and services was unchanged during the quarter, but grew by 3.4 per cent over the year.

And the volume of imports of goods and services fell by 0.5 per cent during the quarter and by 1.5 per cent over the year. Which means that both the increase in exports and the fall in imports contributed to the overall growth in real GDP.

But ask yourself this: why would imports be falling? Because both consumer spending and business investment spending are so weak. Oh.

A final sign of the economy’s weakness comes when you remember how strongly our population’s been growing. Allow for this and you find that real GDP per person grew by just 0.2 per cent during the quarter and by only 0.7 per cent during the year.

And that’s before the economy’s hit by the bushfires and the economic disruption caused by our efforts to limit the spread of the coronavirus.

Read more >>

Eat, drink and be merry, for tomorrow the virus won't get you

The coronavirus will harm the economy – ours and the world's – but how much damage it does will be determined not just by how far and how fast the virus spreads, but by what the government does to protect us from that spread and what people take it into their heads to do to protect themselves.

There's a good chance the reaction to the threat of the virus will do far more damage to the economy – and the livelihoods of the people who constitute it – than the damage it does to life and limb.

If the reports we hear of people stripping supermarket shelves and deserting cafes, bars and other places of recreation are a guide, the main consequence so far is an outbreak of national hypochondria. Crazed by an overexcited world media, Aussies have gone into panic mode well before the threat has materialised.

I suspect part of the problem is that word "pandemic" – the thing Scott Morrison last week acted on ahead of the World Health Organisation having declared. To many of us it's a highly emotive word, raising images of people dropping like flies as the disease spreads.

In the minds of epidemiologists, however, it just means the virus has popped up in quite a number of countries, without saying anything about how far and fast it's spreading in those countries.

According to Professor Ilan Noy, a specialist in the economics of disasters at New Zealand's Victoria University, "All signs point to a global overreaction to this crisis, and therefore to an amplified economic impact."

According to Professor Cass Sunstein, of Harvard Law School, "A lot of people are more scared than they have any reason to be. They have an exaggerated sense of their own personal risk."

That's because humans are notoriously bad at assessing the risks they face. Studies by psychologists and behavioural economists show individuals typically overestimate risks that are memorable, vivid or generate fear, while underestimating more common risks.

Noy says that, in a survey of 700 people in Hong Kong at the height of the SARS epidemic in 2002, 23 per cent of respondents feared they were likely to become infected. In the US, 16 per cent of respondents to a survey felt they or their family were likely to be infected. The actual US infection rate was 0.0026 per cent.

Sunstein says it's likely that, for residents of a particular city, "The risk of infection is really low and much lower than risks to which they are accustomed in ordinary life – say, the risk of getting the flu, pneumonia or strep throat."

One implication of this, he says, is that, "Unless the disease is contained in the near future, it will induce much more fear, and much more in the way of economic and social dislocation, than is warranted by the actual risk.

"Many people will take precautionary steps - cancelling holidays, refusing to fly, avoiding whole nations - even if there is no adequate reason to do that. Those steps can, in turn, increase economic dislocations, including plummeting stock prices."

But let's say you defy the odds and actually get infected. What are your chances then? Last week WHO said that, using the figures for China, for every 100 cases of coronavirus, about 80 people get better unassisted, 15 have serious but manageable problems, five are very serious and about three die. But that's for China. For the rest of the world it's more like 1 per cent who die.

So, like the flu, the coronavirus is usually something you get over fairly quickly. The people who don't recover quickly tend to be the elderly, and the few who die are usually those with another complication, such as asthma, cancer, cardiac disease or diabetes. (Oh no, that's me! I'm done for.)

But while you await your certain demise, remember something Scott Morrison said last week that didn't hit the headlines: "You can still go to the football, you can still go to the cricket, you can still go and play with your friends down the street, you can go off to the concert, and you can go out for a Chinese meal."

When it comes to the economy, remember that the share market is the drama queen of the financial world. It tends to overreact to bad news – but it does so knowing that later in the week it will be overreacting to good news. A cut in interest rates? God be praised.

Even so, the coronavirus and the efforts to contain it – official and amateur - have had adverse effects on the Chinese economy, with flow-on effects to our economy among others. The Chinese are already getting back to business, but it will be slow and economic activity – producing and consuming – has been seriously disrupted in the present quarter and probably the next. The world economy isn't strong and this will make it weaker.

Our border controls are hitting our tourist industry and universities. How much the overreaction of individuals adds to that we'll soon start seeing in economic indicators rather than anecdotes. In principle, we're experiencing a temporary adverse shock to the economy extending over a quarter or three, followed by a partial bounce back as consumers release pent-up demand and firms rush to fill back orders and re-stock.

Coming on top of all our other economic woes, however, it won't be fun.

Read more >>

Productivity problem? Start at the bottom, not the top

Whenever we’re told we’re not achieving much improvement in our productivity, a lot of people assume it must be something the government’s done – or more likely, failed to do. Such as? Isn’t it obvious? Failed to cut the tax on companies and high income-earners.

But though the national rate of productivity improvement is merely the sum of the performances of all the industries that make up the economy, no one ever imagines the problem might be something the nation’s businesses have been failing to do.

This, however, is where a lot of research is pointing, as summarised by the Labor shadow minister and former economics professor, Dr Andrew Leigh, in a recent speech. He starts by explaining that productivity measures how efficiently the economy turns labour and capital into goods and services.

"Last year, Treasury’s Megan Quinn revealed that researchers in her department, led by Dan Andrews, had been investing in a new analysis that links together workers and firms, and delving into fresh data about the dynamics of the Australian economy," he says.

"Since 2002, Quinn showed, the most productive Australian firms (the top 5 per cent) had not kept pace with the most productive firms globally. In fact, Australia’s 'productivity frontier' has slipped back by about one-third. The best of 'Made in Australia' hasn’t kept pace with the best of 'Made in Germany', 'Made in the Netherlands' or even 'Made in America'."

And then there’s the other 95 per cent. In the past two decades, their output per hour worked has barely risen. So 19 out of 20 Australian firms don’t produce much more per hour than they did when Sydney hosted the Olympics.

What’s going wrong? "Part of the problem is that many firms aren’t investing in new technologies," Leigh says. "Less than half have invested in data analytics or intelligent software systems. Only three in five have invested in cyber security, making them vulnerable to hacking and ransomware attacks.

"It’s not just that companies aren’t investing simply in technology – they’re not investing in anything at all." In the Productivity Commission’s regular report, it measures how the amount of capital equipment per worker has increased, a process known as "capital deepening".

The commission has had to invent a new term to describe what happened last financial year – "capital shallowing". For the first time ever, the amount of capital per worker went backwards. "Given that capital deepening has accounted for about three-quarters of labour productivity growth, this is frightening," Leigh says. (To which Scott Morrison might well respond: do I look frightened?)

Across the economy, businesses are cutting back on research and development and investing less in good management. Just 8 per cent of our firms say they produce innovations that are new to the world, down from 11 per cent in 2013.

A Productivity Commission study has found that half the slowdown in productivity improvement in the market economy in recent years is accounted for by manufacturing. A separate survey of management practices in manufacturing firms found that Australia’s managers rank below those in Canada, Sweden, Japan, Germany and the US.

Leigh argues that newborn firms are as critical to an economy as newborn babies are to a society’s demography, bringing fresh approaches, shaking up existing industries, and offering new opportunities to workers.

Yet our new-business creation rate isn’t accelerating, it seems to be stopping. Defining new businesses as those that employ at least one worker, Treasury estimates that the new-business formation rate in the early 2000s was 14 per cent a year. Now it’s down to 11 per cent a year.

"Another sign that the economy may be stagnating comes from figures on job-switching," Leigh says. "Workers who switch jobs typically experience a significant pay increase. In the early 2000s the rate of job switching was 11 per cent of employees a year. Now it’s down to 8 per cent. And "Treasury’s analysis finds that a drop of one percentage point in the job-switching rate is associated with a 0.5 percentage point drop in wage growth across the economy".

The drop we’ve experienced is "not the fault of employees: there are simply fewer good opportunities available. According to Treasury’s analysis, much of the drop in job-switching is because workers are less likely to transition from mature firms to young firms. With fewer start-up firms, it stands to reason that there are fewer start-up jobs."

It’s all pretty dismal – and, of course, all the fault of the government. But I know just the reform we need to fix the problem. Morrison should offer chief executives of ASX200 companies a cut in their tax rate, provided they can show they were too busy during the financial year sticking to their knitting to attend any meetings of the Australian Business Council called to discuss lobbying the government for favours.

Read more >>