Coronavirus: How quick we are to abandon financial self-reliance

Simon Cowan

28 March 2020 | Canberra Times

The economic impact of this shutdown will be immense and last for months at least – more likely years. Despite these actions, the outbreak has not yet been contained.

This has led some to claim that the cure is proving worse than the disease. As Thomas Friedman put it in The New York Times, “either we let many of us get the coronavirus, recover and get back to work …[o]r, we shut down for months to try to save everyone everywhere from this virus … and kill many people by other means, kill our economy and maybe kill our future.”

US President Donald Trump appears to be sympathetic to this way of thinking, committing to reopening the US economy by Easter.

Yet it would be a mistake for Australia to follow this thinking.

Those arguing to reopen the economy are either downplaying the risk of widespread deaths, or are directly or indirectly relying on the concept of herd immunity as the primary defense against increasing contagion.

Yet, the advice being provided by medical professionals is that herd immunity (where 60 per cent of the population is immune to the virus, retarding further transmission) is not a viable response to this initial outbreak. Longer term, herd immunity will be the likely protection for vulnerable people against the return of coronavirus – but this strategy is underpinned by widespread use of a reliable and safe vaccine.

Simply allowing large swathes of the population to catch a potentially fatal virus – even if the symptoms are typically mild for younger, healthy people – seems incredibly risky. In the absence of either a vaccine or proven treatment options, the most likely outcome is the complete overwhelming of our health system and hundreds of thousands of deaths.

If this disease is fatal to just 1 or 2 per cent of victims, across 60 per cent of the population that is between 150,000 and 300,000 Australians dead from the effects of the virus alone; plus tens of thousands more from the overwhelming of the health system.

In effect, this is the bargain we risk taking: 150,000 or more deaths for a milder recession. Would the public really accept that deal?

However, there is more merit in the argument that there has not been sufficient appreciation of the lockdown’s (and uncertainty’s) social, health and economic impact on people, both during the crisis and afterwards. The hardships facing Australian families are a crucial problem for policy makers.

Some businesses may be able to pivot towards remote service delivery, while others will be fortunate enough to secure new jobs in industries that are not yet subject to shutdown.

For the rest, given that restarting the economy and returning to the old normal is not yet possible, there are only three options to consider: savings, debt and taxpayer support.

Unfortunately, the default suggestion has been that the government should step in and simply absorb the losses for everyone. Cashflow packages for businesses, industry rescue plans for the hardest hit industries, wage subsidies for workers, and massively expanded welfare for everyone else.

This belief is driven as much by ideology as evidence. For example Nicki Hutley argued on the ABC website that allowing access to superannuation during this crisis was “abrogating responsibility from the federal government” because “doing ‘whatever it takes’ to support the health system and the economy is the responsibility of government.”

How quickly we have abandoned self-reliance. Taxpayer support should be the last port of call, and only for those who cannot look after themselves. It should not be the first.

The socialisation of the costs of pandemic is not the only way of dealing with the crisis. There is a role for government to play beyond the public health arena, but it is not that of acting in loco parentis for the whole country.

Debt should be one of the primary mechanisms for smoothing a short-term income shortage, especially in an environment where we expect things to return largely to where they were once the crisis is over.

The role for government, and more specifically the Reserve Bank, is to provide an overabundance of liquidity in the short term, and in the longer term generate inflation to make paying off debt easier. Far from being concerned about too much inflation from quantitative easing, we should be targeting a higher base level of inflation to get the economy moving again.

As for savings, the government’s decision to allow access to super is a good one. But it would be improved by altering the structure from direct withdrawal to allowing people to take out what are effectively income-contingent loans against their super balances.

The way this would work is surprisingly simple. An individual could supplement their income (or welfare) by borrowing a regular income stream from their super balance, tax-free up to a certain maximum percentage. This would be recorded by their super fund as a liability against their super balance, and have a notional rate of interest attached (although effectively this is interest they owe themselves).

Once the person’s income rose above a certain level, they would make additional, untaxed, superannuation contributions until the liability and interest was discharged. At that point, their super contributions would return to normal. If they never again meet the minimum income level, the liability would be settled from their super balance on retirement.

This structure would significantly alleviate concerns about future retirement incomes, because most people would top their super back up once things return to normal.

Liquidity for such payments could even be provided through the RBA quantitative easing program, which would mean super funds would not have to liquidate asset holdings in a bear market.

For those concerned about the economic sustainability of a prolonged shutdown, these solutions may be more palatable than reopening the economy and letting the coronavirus wreak havoc.

At a minimum we should be wary of allowing a public health crisis to be the catalyst for a permanent shift in our view of the role of government.

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