Ideas@TheCentre brings you ammunition for conversations around the table. 3 short articles from CIS researchers emailed every Friday on the issues of the week.
Living standards, livelihoods and business survival are at stake as the pandemic — and government responses to it — wreak economic havoc. This is why there is so much focus on the depth and duration of the economic slump since February; and the timing, strength and durability of the recovery.
The economics discipline — aka the dismal science —is in its element in this grim setting, but economic commentary has unwittingly taken a turn to the comical in its obsession with catchy ways of visualising predictions of the economy’s trajectory.
The search is on for a letter of the alphabet or a symbol that does the best job. So far we have seen at least nine contenders mentioned: V, W, U, L (which doesn’t seem to be a recovery at all), a hockey stick, the Nike ‘swoosh’ logo, a staircase, a sawtooth edge — and even the square root radix symbol.
This is a reminder of economists’ fascination with the ‘J curve’ in the 1980s. It was meant to depict how the current account would respond to the devaluation of the Australian dollar. In reality the response looked nothing like a J, but by then we had found the current account deficit didn’t matter so much after all.
Like the current account back then, the slump and recovery now are most unlikely to neatly resemble any letter or symbol.
If there has to be any descriptor of what lies ahead for the economy, there is nothing better than a ? — a good symbolic representation of the near impossibility of exactitude in economic forecasting.
We just don’t know exactly what path the economy will take, other than that the slump is deep (already known); the damage will be long lasting; and a full recovery will take at least several years with plenty of wobbles along the way.
And ‘full recovery’ does not mean getting back to the pre-pandemic levels of GDP but getting back to the growth path it was on; or preferably a higher one, given that economic growth had already been mediocre for a number of years.
More important than finding the right letter or symbol is developing the policies most likely to produce the strongest and most durable recovery given the unpredictability of all the variables Australian governments cannot control.
As set out in The Economic Challenge of Covid-19, the Australian economy will benefit most not from repeated doses of Keynesian fiscal stimulus or the security blanket of JobKeeper, but economic reforms to sharpen incentives, boost investment, cut regulation and facilitate business adjustment to post-pandemic conditions. Such policies are needed to maximise job creation in the short-term and productivity growth in the longer term.
The performance of the economy was weak before Covid-19, and now it is perilously close to flat-lining.
In particular, business investment is heading towards record low levels as a share of the economy.
In response to the economic contraction of the COVID-19 pandemic, the federal and state governments have dramatically expanded the scope and scale of state involvement in the economy.
This massive spike in government spending continues to be funded by increased government borrowing that has put Australia on a path to having about a trillion dollars’ worth of public debt, mostly owed to foreigners.
Some of the policies implemented can be considered as welfare payments aimed at ensuring that people whose livelihoods have been impacted by the COVID-19 restrictions are able to maintain themselves and their families. In this way, they are part of the social safety net, as well as a means of temporarily holding together the core structure of the economy.
However, the welfare support measures should not be regarded as policies that will ensure a recovery from the current downturn. Wealth is not generated from government-funded consumers’ spending. Rather, it comes from profit motivated production in the private sector.
Ongoing policy initiatives focused on governments borrowing in order to stimulate the economy — particularly through consumer spending — will fail to revitalise the long term productive capacity of the economy.
In Lower Company Tax to Resuscitate the Economy, Professor Tony Makin, Michael Potter and I outline the dangers for the economy, and the solutions.
There is general agreement in mainstream macroeconomics that private investment not only boosts aggregate demand in the short run, but strengthens economic growth on the supply side in the long run via an enlarged capital stock.
Hence, the recovery of the economy to sound economic health depends on resuscitating the productive capacity of the business sector through increased private investment that will feed through to higher labour productivity and wages. The best way to achieve higher private investment is to reduce the tax burden the federal government places on Australia’s companies.
Where does investment come from? Domestic savings and foreign investors. But investment levels have fallen so far recently that domestic saving have exceeded investment in the Australian economy.
What reduces companies’ incentive to invest? The company tax rate. If the company tax rate was reduced, investment would rise.
Local and international evidence clearly supports this argument, showing that as tax rates go down, investment, productivity, employment and GDP all increase.
Australia’s company tax rate is out of line internationally. Lowering it would make Australia more competitive in the market for foreign investment.
Jeff Bennett is Emeritus Professor at the Crawford School of Public Policy at the Australian National University. Tony Makin is Professor of Economics at Griffith University. Michael Potter is an economist in the financial services sector.
Parts of Victoria are going back into Stage 3 lockdown. This was inevitable – not due to rising coronavirus cases, but because in March we relinquished everything to fight COVID-19.
Predictions of catastrophic numbers of corona cases and deaths prompted Victoria to re-impose draconian restrictions, some even harsher than before. People in several public housing towers are not allowed to leave. At all.
Although distressing, it is hard to argue against these restrictions because, in March, as Lord Sumption stated we “willingly surrender[ed] [our] freedom in return for protection against some external threat.”
As the coronavirus crisis was unfolding, the media and the Australian people accepted the government should act —do anything — to stop a catastrophe. They acted, we obeyed.
We obeyed as businesses were shuttered, families were forbidden from visiting one another, and people were restricted from farewelling their late loved ones.
We watched as fines were handed out for eating a kebab or taking a driving lesson.
We enthusiastically downloaded the pointless COVIDSafe app because we were told it was necessary to not only save lives, but to reopen the economy.
As businesses started to open, they dutifully followed the guidelines on collecting patrons’ details, enforcing social distancing, and enhanced cleaning.
Not only did Australians comply with the new and increasing restrictions on our liberties, but we rewarded our political leaders with stratospheric approval ratings.
So, it was always inevitable that as soon as the COVID threat re-emerged, governments would feel safe in acting the same way as they did the first time.
Whether this was the best, or only, way to stop the spread of the virus is not yet known — but it is what happened.
After having made the pact in March that the COVID threat required the shuttering of all aspects of our lives, we now must decide if this is the way we will fight going forward.
Despite what health officials think, repeating lockdowns indefinitely is not feasible.
The Morrison government admits the economy is in bad shape, and the economic and social costs of a cycle of lockdowns would be disastrous.
Apparently, “we are all in this together” but governments should be careful about stretching the ‘togetherness.’ We tolerated the first round of lockdowns in the name of public health. Our obedience and trust might not last forever.