Women, part-timers and the young hardest hit by jobs crisis

At a time like this, measuring the rise in joblessness is very important. But it’s a trickier job than many realise. You have to draw boundaries somewhere, and where they should go can always be debated.

But some who don’t like comparing shades of grey think the problem can be reduced to good guys and bad guys. Why do the figures look strange? Because some prime minister a few years back changed the definition of unemployment to make it look smaller. Would you believe that someone who’s worked as little as one hour in a week is counted as employed?

Sorry, this fiddling is an urban myth. The truth isn’t nearly so exciting. But before I deflate the balloon, let me show you the circumstantial evidence.

The most recent figures, for April, show America’s rate of unemployment leaping more than 10 percentage points to 14.7 per cent – in just a month. Canada’s unemployment jumped 5 points to 13 per cent.

What happened to our rate? It crept up from 5.2 per cent to 6.2 per cent. Really? Are you kidding? What’s that if it’s not a fiddle?

Or, consider this. Our figures show that about 900,000 people lost their jobs in the four weeks to mid-April. But they also show that unemployment increased during the period by only about 100,000. How’s that possible? What’s that if it’s not a fiddle?

Actually, it’s support for one of my favourite sayings: the world is a complicated place. There are puzzles everywhere. If you want everything to be black or white – all good or all bad - you should never have left the security of primary school.

So, it may look like a conspiracy, but it ain’t. A sign that we’re dealing with a myth is that the identity of the PM who did the dirty deed changes with the political sympathies of the person who tells you they remember him doing it.

The figures we get each month for how many people are employed, unemployed or neither (“not in the labour force”) come from a huge monthly survey of households conducted by the Australian Bureau of Statistics, which brooks no interference from politicians.

The bureau follows international conventions set by the United Nations' International Labour Organisation, in Geneva. Its definitions haven’t changed in many decades. (I once ran into a union-movement economist who was an Australian representative on the ILO committee reviewing the definitions. To my surprise, he staunchly defended the decision to leave them unchanged, including the bit about one hour’s work meaning you were employed.)

As the bureau explains in its release, the main reason the North Americans’ unemployment rates are so much higher than ours has to do with workers who’ve been “stood down” for some weeks because the boss has no work for them, but hopes to bring them back when things improve.

We class such people a still employed, whereas the North Americans class them as unemployed. The bureau estimates that, if we did it the American way, our unemployment rate would be not 6.2 per cent, but 11.7 per cent.

Although about 900,000 Australians ceased to be employed during the four weeks to mid-April, it may amaze you that, in the same period, about 300,000 people went from not having a job to having one. This surprises people because they don’t realise how much coming and going there is in the labour force, even during recessions.

The bureau estimates that, even in a month where total employment seems hardly to have changed, on average about 300,000 people leave employment and about the same number move into employment.

It’s the net fall in employment of about 600,000 that matters. Why then did unemployment rise by only about 100,000? Because part of the definition of being unemployed is that you must be actively looking for job. Since we were in lockdown, 500,000 of these people didn’t start looking for another job, and so were classed as “not in the labour force”. As soon as they do start looking, they’ll be unemployed.

People make too much of the rule that an hour’s work means you’re not unemployed. Only 2.5 per cent of all those employed in March worked for only one to five hours a week. It’s true, however, that the international definition of unemployment is too narrow, especially in a world where one-third of our jobs are part-time.

This is why the bureau always calculates the rate of under-employment – people who have (mainly) part-time jobs, but would prefer to be working more hours than they’re able to, maybe even full-time hours.

The coronacession has meant many workers are having their hours cut. The number of underemployed people jumped by 100,000 to 800,000, taking the underemployed proportion of the labour force from 8.8 per cent to 13.7 per cent.

Delving into the figures, about 55 per cent of the 600,000 jobs lost in April were held by women, even though women accounted for only 47 per cent of the workforce. Almost two-thirds of the jobs lost were part-time.

Employment of people aged 15 to 24 fell by about 11 per cent, compared with a fall of 3 per cent for prime-aged workers (aged 25 to 54). Unemployment is a much bigger problem for the young, as is underemployment.

While your head’s still spinning, one last puzzle. Being counted as unemployed by the bureau is not the same thing as being eligible to receive unemployment benefits - the “JobSeeker” payment - from Centrelink.

Some people counted as unemployed aren’t eligible for the dole (often because their spouse’s income is too high), whereas some people eligible for the dole aren’t counted as unemployed (because they’re allowed to work a few hours a week before the dole cuts out).

Right now, however (and partly thanks to a temporary increase in how much your spouse may earn), there are 800,000 people counted as unemployed, but twice as many – 1.6 million – getting the JobSeeker payment.

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Joblessness hasn't been worse in our lifetimes - nor as hidden

Voters have highly stereotyped views about which side of politics is better at handling which of our problems. So it’s no surprise that the party of the bosses is seen as better at managing the economy, the budget and interest rates, whereas the party of the workers is regarded as better at industrial relations and anything that involves the government spending money.

These stereotypes aren’t necessarily right, but they’re deeply engrained in our thinking. What keeps politics interesting, however, is that voters’ list of our most pressing problems keeps changing with our circumstances. Sometimes Liberal strongpoints are at the top; sometimes Labor strongpoints.

The new problem for Scott Morrison is that though the Libs are seen as best at managing the economy and the budget, when the economy falls into to recession, voters’ focus shifts to the massive unemployment.

That’s a problem his opponents are regarded as better at – perhaps because we know fixing it involves spending shed-loads of money. The Libs are feeling terribly guilty about the $200 billion they’ve committed to spending so far, and are telling themselves they’ll be turning off the tap in September, come what may.

I’m sure you remember the shocking TV footage we saw some weeks back of long queues outside Centrelink offices. You’ve seen the movie; now read the stats. They arrived last Thursday. They showed what had happened in the jobs market just between mid-March and mid-April.

They were the most appalling news on jobs we've had since the Great Depression of the 1930s. Actually, they’re worse than then, in the sense that they happened in just a month (with some more bad months to come), whereas in the Depression it all took several years.

But the unique nature of this coronacession – where, acting under doctors’ orders, the government simply instructed non-essential businesses to close their doors – makes it much harder than usual to see what’s happening in what the media call “the jobs market” and the Australian Bureau of Statistics calls “the labour force”.

At present, a lot of the job loss remains hidden. Tracing what’s happening is like peeling an onion. Except that onions get smaller as you peel, whereas this problem gets bigger as you delve into the fine print. Much bigger.

How do we know how bad it was in the Depression? We know the rate of unemployment got to 20 per cent. By that measure, our problem is small. In April the number of people classed as unemployed by the bureau rose by about 100,000 to more than 800,000. Expressed as a proportion of the labour force (that is, everyone with a job or actively seeking one), the rate of unemployment rose just from 5.2 per cent to 6.2 per cent.

But don’t trust this. As most people know, the bureau’s definition of what it means to be unemployed is very narrow. You have to be actually looking for work and ready to take up any job you’re offered.

You get a better idea from the news that, of the 13 million Australians employed in March, 900,000 lost their jobs in April. However – and I know you’ll find this hard to believe – 300,000 people without jobs gained one during the month, so the net loss of jobs was almost 600,000.

But why, then, did unemployment rise by only 100,000 rather than 600,000? Because 500,000 people didn’t look for another job – understandable since so many employers were in lockdown – and so were classed as “not in the labour force”.

So that’s the first source of hidden joblessness. Most of those people will start looking for jobs as soon as it makes sense to, and then will be counted as unemployed.

The next source of hiddenness comes from the new and worthy JobKeeper wage subsidy scheme, intended to preserve the attachment between employers and their workers even though, during the lockdown, those employers don’t have much work needing to be done.

There are now more than 6 million workers on the JobKeeper allowance – that is, about half the entire workforce. Because they’re receiving a wage, they’re all counted as employed. Some are working pretty much as normal and some are working reduced hours, but many do no work at all.

It turns out that the best guide to what’s happening comes from the change in the total number of hours worked during the month. It’s fallen by an unprecedented 9.2 per cent, double the 4.6 per cent fall in the number of people employed.

The fall in hours is explained by people losing their jobs, people keeping their jobs but being given fewer hours to work, and people on JobKeeper working fewer hours – or none. This explains why, despite the limited rise in unemployment, the rate of underemployed workers (those working fewer hours than they want to) leapt from 8.8 per cent to 13.7 per cent.

All told, that means about 2.7 million people – almost one worker in five – either lost their job or lost hours during just a month. Gosh.

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Obsession with jobless is Morrison's best chance of survival

As Scott Morrison contemplates returning to politics as usual, there’s something he should keep front-of-mind: governments that preside over severe recessions usually get tossed out.

Voters’ gratitude for being saved from the virus will fade, leaving them staring at that triumph’s horrendous price tag – its opportunity cost: the huge number of people still waiting to get a job back as we approach the federal election in early 2023.

It follows that Morrison’s best chance of pulling off two election miracles in succession rests in doing all in his power to get the rate of unemployment back down to the 5 per cent it was at before the virus hit.

To Morrison, returning to politics as usual means returning to what he calls “ideology” and I call governing not for all Australians but for the Liberal tribe – team Lifters – the “base” and its big business donors.

What he means by ideology is fighting for less government, lower taxes and the protection of tax breaks. Which, in turn, means shifting the balance in favour of the Lifters and against the rival Leaners tribe, aka Labor.

Liberal grandee John Howard sanctioned Morrison’s huge increase in government spending by telling him that, in a crisis, there’s no ideology. True. Any Liberal government would have done the same, as the big spending of Britain’s Conservatives and America’s Republicans suggests.

But now the lockdown is being unlocked, Morrison's being pressed by his base and big business supporters to get back to smaller government and lower taxes. He should be cutting company tax and revisiting industrial relations reform. If that ends the bipartisan co-operation from Labor and the unions, so be it.

But I’d think twice if I were Morrison. People close to him say that, at heart, he’s a pragmatist rather than an ideologue. If so, he should follow his instincts, which have served him well so far.

The case for not only delaying winding back the existing spending programs, but also spending a lot more, has much pragmatism going for it – especially if you’re hoping to be re-elected.

The decisions Morrison must make come in three parts. First is when it makes sense to start withdrawing the expensive JobKeeper wage subsidy scheme and the surprisingly generous doubling of the JobSeeker payment, which were always intended to be temporary.

The emergency and experimental JobKeeper scheme – which divides those without work into first and second class citizens and is replete with anomalies - will have to be brought to an end sometime.

By contrast, the idea that we could go on starving the unemployed on $40 a day forever was unrealistic. Now, after a recession as bad as this one, it will be a long time before voters again share the Lifters’ prejudice that anyone without a job must be a bludger.

Once most of the economy’s reopened, there will be a bounce back to some extent. But as has become the norm in recent years, the official forecasters are much more optimistic about the extent of the bounce-back than private forecasters are.

If I were Morrison, I wouldn’t be withdrawing any support to the jobless before I’d seen actual figures on the extent of the initial recovery. Withdraw the two key measures too soon and the much feared “second wave” could be economic rather than medical.

The bad news is that government spending to date has merely reduced the depth of the economy’s fall. Of itself, it’s not capable of stimulating growth in private sector demand in any positive sense.

And right now, it’s hard to think of a non-government factor that could drive the economy forward.
Consumer spending by deeply indebted, frightened households that are about to take a cut in their real wages? New investment by businesses facing weak demand for their products and much idle production capacity? Increased exports to a heavily recessed world?

So Morrison’s second pragmatic task is to come up with spending measures to actually kickstart demand in the immediate future. It wouldn’t be hard to think of sensible measures - provided the primary beneficiaries are people ineligible for membership of his Lifters tribe.

Third, this short-term pump-priming does need to be supplemented by reforms to keep the economy growing in the medium to longer term. But the place to look for ideas is the Productivity Commission’s Shifting the Dial report, not his Lifters tribe’s tired trickle-down agenda, which is rent-seeking thinly disguised by Liberal mythology about lower taxes boosting incentives.

It’s pseudo-economics, unsupported by empirical evidence. Rent-seeking is about grabbing a bigger slice of the pie, not growing it. You can get away with this when times are good, but when times are as tough as they will be, and since it doesn’t actually work, it won’t wash with the great unwashed voter.

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There's a lot of economic worry about, but here's what matters

If you’re wondering what shape the economy will be in when we come out of lockdown, how the recovery will go – what to worry about and what not to – there are three key issues: the economy and its growth, the budget and its deficit, and unemployment and its consequences.

These three are different but related. The trick is to understand how they’re related. What causes what. The media bombards us with information about them — without pausing to put them into context.

For instance, we hear so much about the budget and its deficit (which adds to the huge amount of debt) that I’m sure some people think the budget is the economy. If only we could get the budget balanced, the economy would be right, right?

No. But you could be forgiven for thinking so because Prime Minister Scott Morrison and his Treasurer, Josh Frydenberg, have been saying things that get the two muddled up. They’ve been saying: terribly sorry about what the lockdown's done to the economy, and all the money we’ve had to spend on JobKeeper and JobSeeker and the rest as a consequence, but at least we’d got the economy back in good shape before, through no fault of ours, we were hit by the virus.

But they’re not talking about the economy, they’re talking about the budget. It was the budget they’d finally got back to balance after six years in office and were set to it get back into surplus this year before the virus upset their plans.

They were saying, at least we’d got the budget back in balance before we had to start spending like mad — about $200 billion so far — and going back into (huge) deficit. Trouble is, they’d got the budget back in shape by causing the economy to grow more slowly than it would have. So the economy was in a weak state before the virus hit – which doesn’t sound like a good thing to me.

Huh? Let’s get back to basics. The budget is just a summary of the federal government’s finances: how much money it brings in from taxes and charges, less how much money it puts out in spending on health, education, pensions and the rest.

When it raises and spends equal amounts, its budget is in balance. When it spends more than it raises, its budget is in deficit and this deficiency has to be covered by borrowing. When it raises more than it spends, its budget is in surplus. It will use the surplus to repay money it’s borrowed in earlier years.

The government and its budget are just part (a reasonably small part) of the economy, which consists of all our businesses and our households (you and me) as well as the government (federal, state and local).

The money the government raises in taxes comes from the rest of the economy, whereas the money it spends goes to the rest of the economy. So when the government reduces its deficit (as it has been until now), this means it’s reducing the net amount it’s putting into the private sector, causing its growth to be weaker than otherwise.

This can be a good thing if the private sector is growing too strongly and threatening to worsen inflation. But if the private sector’s growth is weak, as it has been, this pullback by the government will weaken it further – as it has been.

Until now. The response to the virus, with all the lockdown has done to reduce the turnover of businesses and the income of workers, has hit the private sector for six. But all the extra government spending – which has hugely increased the budget deficit – has done much to break the private sector’s fall. That cushioning will make it easier for businesses and workers to get back on their feet.

But here’s the thing: the government’s big spending (plus, don’t forget, the much less income and other taxes we’ll be paying on our greatly reduced incomes) has blown out the budget deficit and will hugely increase the government’s debt.

So, which is the bigger worry? The big increase in the government’s debt, or the big contraction in the economy? I think it’s obvious. It’s the health of the economy that matters most because that’s where all Australians (even the retired) gain their livelihood.

The budget isn’t an end in itself. It’s an instrument – one of the means to the ultimate end of helping Australians have a good life. In recent weeks, we’ve seen the government doing what all governments do: using its budget to protect our lives and livelihoods.

Sure, that will leave us with a lot more deficit and debt. But first things first. What matters most is the health, economic and social wellbeing of the people who constitute “the economy”.

We’ll worry about the debt later. In any case, as I’ll explain another day, the debt isn’t as worrying as it looks. Hint: the lower interest rates are, the less you need to worry about how much you owe — and the less hurry you need to be in to pay it back.

Next, what’s the relationship between the economy’s growth and unemployment, and which matters more? The economy is usually measured by the value of all the goods and services we produce – gross domestic product – during a period, which is also the nation’s income.

The econocrats are expecting real GDP to fall by an unprecedented 10 per cent in the present quarter, but then start growing quite quickly as businesses get back to normal. If that happens, it will be good because it’s goods and services that people are employed to help produce.

So an early return to growth in the economy is good because it gets employment up and unemployment down – which is what matters most if you think people matter more than money.

But here’s the trick: the economy returns to growth a lot earlier than unemployment returns to where it was.

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Let's not go back to politics as usual. It doesn't work.

With life cautiously returning to normal after the great lockdown, it’s time for Scott Morrison – who’s “had a good virus” – to think about where he goes from here. Does he want to be remembered as a single-minded warrior for his Liberal tribe, soon replaced by another scrapper, or as one of our great prime ministers, up there with Curtin and Menzies?

Does he want to cling to office by exploiting our divisions, or by uniting us in common cause? Does he want to deliver for the party base and its big business donors, or for everyone, even those without political clout?

After the shock of winning an election neither he nor anyone else expected him to, then being caught with no plans to do anything much, Morrison has been on a fast leadership learning curve. First his failure to take command of the bushfire crisis, then rising to the challenge of a pandemic for which we were quite unprepared.

Along with the premiers, his popularity has soared. At times of threat, people crave strong, confident leadership, and he has provided it. But as things start returning to normal, will it be back to squabbling politics as usual, as so many smarties are gleefully predicting?

Certainly, that’s where all our politicians’ instincts would lead them, and the media’s love of conflict would want them to be. But if Morrison allows that to happen, all the goodwill and community spirit will be lost – to Morrison’s detriment and ours.

Much has been made of our loss of trust in politicians and governments in recent years, but new polling by the Australian National University shows that, between January and April this year, confidence in the federal government increased from 27 per cent to 57 per cent, with state governments up from 40 per cent to 67 per cent.

This may be explained solely by our need for strong leadership, but I suspect another part of it is the cessation of politics as usual. Morrison has been too busy fighting the virus to waste time badmouthing his political opponents, saying things calculated to mislead, or making promises he can’t keep.

He’s been busy explaining how viruses work, what he plans to do about it and what he needs us to do. He’s been explaining, explaining, explaining. He’s stopped taking shots at the unions because he needs their co-operation. The opposition hasn’t been game to make any criticisms that weren’t constructive.

And we’ve loved it.

The news media are getting far more attention from their customers than usual. That may be because the virus is so new and frightening, but it also suggests the public finds a constant diet of the pollies’ squabbles and misbehaviour less engrossing than the press gallery does. Maybe people might be more interested in sensible discussion of the policies affecting their lives.

The handling of an epidemic and the way we cope with the huge economic cost of the medicos’ drastic remedies have obliged Morrison to rely heavily on his health and economic bureaucrats – the same people he was telling a few months earlier to keep their policy opinions to themselves and just do what they were told.

The ANU polling shows the public’s confidence in the public service has gone from 49 per cent to 65 per cent. Apart from serving the public, the bureaucrats’ job is to keep their political masters out of trouble. Who knew? Another of Morrison’s recent “learnings”.

Like most issues, responding to pandemics is a shared federal-state responsibility, requiring much co-operation and co-ordination – which, except for those holding neatness to be the highest virtue, has not required states with widely varying experiences of the virus to move in lockstep.

I suspect one reason the pollies are rating high is the blessed relief from federal-state bickering and buck-passing.

What all this says is that politics as usual wasn’t working well. The public was sick of it – as demonstrated by the two main parties’ ever-falling share of the vote and the rise of various populist parties.

Those who think there’s no alternative to politics as we’ve grown used to it show their ignorance. It wasn’t always this unedifying. And now Morrison has demonstrated how well he’s doing without it, there’s no reason we should return to it.

There’s no shortage of problems that need fixing, so governments need a big to-do list. They should focus on explaining and defending those programs, leaving no time for denigrating their opponents. They seem to have no inkling of how unpersuasive and off-putting voters find this.

If you don’t want voters to stop listening, stop refusing to give straight answers to questions. Pretend you’re a real person; throw away the talking points. Stop trying to get elected by telling us the other guy would be worse.

There’s always an important role for oppositions to keep governments on their toes. But less of the “they said white so we’d better say black to make us look different”. And, as Morrison has lately demonstrated, it does impress when you under-promise but over-deliver.

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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.

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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”.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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".

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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.

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