No, we can't just print more money during COVID-19

Simon Cowan

01 August 2020 | Canberra Times

It seems the curse of announcing the delivery of a surplus before it is locked in has struck again.

Not only will the budget record a 12-figure ($189 billion) deficit; public debt at the federal level alone is expected to soar to $850 billion, with the prospect of $1 trillion in public debt in the near future not at all a far-fetched prospect.

Although the government is correctly not seeking to close this gap during the crisis, righting the fiscal ship must soon become a priority – and even then, the enormity of our debt will hang over economic policy considerations for many years to come.

While some claim that government debt is not important – either because we can just print more money or because other countries have managed higher debt burdens – such claims are irresponsible.

Japan might sustain a debt-to-GDP ratio in excess of 200 per cent, but it has also experienced basically no economic growth for 25 years.

It would be folly to assume we can, or should, pay this debt off through prudent fiscal management like a 30-year mortgage.

Debts of this scale require year after year of budget surpluses to pay down – something highly unlikely in itself. An annual surplus of $20 billion (approximately 1 per cent of GDP) only just covers the annual interest bill, while a surplus of $40 billion (in percentage terms equivalent to the largest surpluses in the last 40 years) would still take generations to pay out.

In the real world, this sort of fiscal discipline is impossible. We haven’t balanced the budget in a decade, despite nearly 30 years of consecutive economic growth.

While fiscal restraint will eventually play an important role in managing the numerator of the debt/GDP ratio, it is action on the denominator (nominal GDP) that will allow governments to successfully manage debt of this magnitude.

This means both increasing inflation and generating economic growth.

This is not as easy as it sounds. Neither the Australian economy, nor the global economy, have performed up to expectations since the global financial crisis. Economic growth has been sluggish, and wages growth even more so. Inflation has mired below trend, unemployment was stubbornly high even before COVID-19 and productivity has been languishing near zero for a number of years.

And while some like to blame capitalism and globalisation for these problems, the fact is the economy has been stifled by more and more regulations in recent years. If Australia and the world went through a period of deregulation in the 1980s and 1990s, it has gone through a reverse period since 2008.

For example, the Rudd-Gillard Labor governments would cite the number of new laws they had passed as evidence of their success in governing.

It is surprising that this massive increase in regulation has not really been credited as a major factor in the global decline in economic growth and productivity since the global financial crisis. If the deregulation agenda of the 1980s spurred growth, why would the re-regulation agenda of the 2010s not strangle it?

Business investment, other than a spike in the early 2010s, has fallen precipitously over the past decade, following two decades of steady growth.

Key business enablers – like the banking and energy sectors – have seen near-constant regulatory intervention in this period. As a result, energy prices have skyrocketed and, even though interest rates are basically at record lows, many small and medium businesses face significant difficulties in accessing capital.

Yet the crisis of the 2020s will demand action to produce sustained economic growth. In the medium to long term, by far the biggest contributor to economic growth is productivity. As Paul Krugman said (perhaps proving the broken clock analogy): “productivity isn’t everything, but in the long run, it is almost everything.”

And when it comes to productivity, one of the biggest drivers is deregulation.

It should not be underestimated how difficult reversing the re-regulation trend will be; as the relative failure of attempts by governments to implement a deregulation agenda prior to the crisis have shown.

There are two reasons for this. First, the regulatory state is deeply entrenched, and in many areas vocal advocates for increasing regulation will ferociously oppose any efforts to deregulate industries in favour of business interests, both for ideological and self-interested purposes. Deregulation that has a meaningful impact on business is far more difficult than many advocates believe.

The second reason has to do with the inherent difficulty of driving a deregulation agenda from the top down, rather than the bottom up. A top-down approach tends to focus on the large-scale regulations, which are the most visible and therefore often the hardest to remove.

To be sure, there are some areas where deregulation will deliver economy-wide benefits. Most notable among these areas are industrial relations laws and planning and zoning restrictions.

However, to deliver on the promise of deregulation requires the hard work of going industry by industry, sector by sector, and removing or improving the regulatory impediments in those industries and sectors. There will no doubt be some spillovers; but in many cases the benefits will be localised to those industries.

This is the practical reality of what the Treasurer was referring to when he raised the prospect of supply-side solutions to the looming debt and deficit crises. Much of the low-hanging fruit on the supply side was plucked during the ’80s and ’90s, and what remains (company tax cuts, for example) has proven quite elusive.

The seemingly easy lure of government demand stimulus as a cure to all our economic problems must be rejected. Government cannot solve our long-term economic problems with more spending. If we want productivity to grow, and businesses to invest – and we undoubtedly do – we have to commit to improving the business environment.

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