Economic Ruminations on the COVID-19 epidemic 29/3/20

All governments are very concerned about the economic effects of the COVID-19 pandemic as well they should be.  The medical costs will be huge but as is being belatedly acknowledged the whole of society is to shut down.  Most industries will stop. Few will work; nothing will be produced and there will be much less consumption. Even when it is over, people will not eat out more to catch up, will not go to more movies, live theatres, live music, pubs or clubs and will not have extra haircuts, buy extra clothes, manicures and makeup, nor will they make up for all the things that they did not buy.  Consumers will generally have less money, so they will have no pent up demand; they may be a lot worse off.

For the last several years as I walked through malls, it struck me that so much of the material on show was both expensive and needless.  I saw the figures that 80% of Western consumption is not really needed; it seemed about right to me.  Industry and retailers need to sell this stuff; we do not really need to buy it.  So the economy was highly vulnerable before the current crisis. 

Now governments want to stimulate the economy and are doing it in the political and ideological frameworks that they work in.  Our government wanted to give most of the money to business and let it trickle down, but they had to admit that casuals would then not get paid, and when they could neither eat nor pay the rent, they were not likely to comply with the lockdown.  So there was some pragmatism.

In the US Trump seemed to have seen the economy continuing as an opposite action to acknowledging the epidemic and treating it.  One old Republican, Texas Lt Governor Dan Patrick, felt that the economy was so important that he would take his chances with the epidemic, and if he had to die, he was willing.  He was sure that a lot of grandparents would be happy to go with him.  Stirring stuff- ‘Go over the top’, like WW1!  As the reality gets a bit closer the US had a huge debate to pass a stimulus package that is expected to be $US 2 trillion, or 10% of the output of their economy and 10% more on their national debt. 

The UK one has the Conservatives giving out huge amounts- 80% of wages to keep the employer-employee bond, with a cap.  Replacing wages naturally favours those who had jobs and money to be replaced, as opposed to those who did not.  Are they to stay on the subsistence that they were one before with government subsidies prolonging and accentuating social inequality?  The UK is to set up a new scheme to give out this money. 

Australia is to keep Centrelink and the tax department to give out its money.  Centrelink seemed to have as its function to minimise payouts at all cost, and to have an army of private non-providers to help it.  It could not do its functions before, so it will be interesting to see how it manages its new role.  Its bureaucracy is there, but flexibility, nimbleness and humanity did not seem its strong suits and culture change may be a problem.  Morrison actually massively increased the amount going to Newstart and renamed it Jobseeker, which was a tacit admission that Newstart was not a viable living.

The concept of stimulating the economy with money is an interesting one.  If everyone is locked down and no one can consume, there is no demand.  If there is no demand, there is no production. If there is no production there are no jobs, so where does the money go?  Enough to feed and house people will obviously be absorbed, but beyond that?  Are there company profits from non-production and share dividends from these?  Do all the loans get paid back as normal from the non-producing companies or mortgages, so the banks can continue as normal, and their dividends also? If the banks still want the same interest, do the landlords give rent relief to unemployed workers and stump up the cash for the bank shareholders?

It seems a question of equity.  Obviously some industries simply cannot continue. Airlines, live performers, pubs, clubs, restaurants, hairdressers, masseurs, discretionary transport will be very hard hit and simply need subsidies for their outgoing expenses if these continue.  Fixed costs such as rents, mortgages, rates, often come from either the government or banks.  Variable costs such as power, inputs, wages (assuming workers are just stood down or take leave) relate to production.  So an idea occurs. If the government simply said that society would ‘close down economically’ for 3 months and go to a needs based system, what would happen? 

There could be a universal income for those unable to work.  There would have to be a hold on rents, but landlords could not simply grant this if banks demanded their normal mortgage repayments.  If the interest component were dropped, more recent mortgages would get the most relief, and older ones where the landlords were paying off capital could be negotiated.  The banks of course have borrowed overseas as Australia has a high private debt, but at some point, those who have more will have to contribute more to help the downturn; it cannot be taken from those who have nothing to give.  Shareholder dividends will fall, and presumably this would mean relief schemes for self-funded retirees who are dependent on share dividend incomes.  If all this seems cumbersome, complicated and troublesome, that is because it is.  But the idea that most of industry can just shut down and will spring up again with a few subsidies to it and to workers just to tide it over is also a simplistic nonsense and in time will be seen to be so.  A lot of thought is needed here.   I do not pretend to have all the answers.  But the right answer starts with a definition of the problem(s).

At an international level, Australia’s stimulus package is about 4% of output, the US about 10%, which made their stockmarket go up a lot.  The money will come from ‘quantitative easing’ which is economists’ speak for printing money.  The Reserve Bank issues bonds to the government and the government prints money and owes it to the Reserve Bank that it owns.  When Zimbabwe does this the money becomes worthless because everyone knows that they cannot pay it back. When Australia does it, it may lower the currency a bit as the country is worth the same but there are more of its dollars.  When the US does it it has seignorage as the world’s reserve currency.  It is not printing US dollars only for itself, it is producing them for the world, so the devaluing of its dollar is lessened by the size of its base.  But the idea that countries can simply invent money at will must irk countries that cannot do it, and the Chinese have cut their exposure to US treasury bonds by $60billion since 2000, a drop of about 5%, while the US continues to ramp up its deficit, currently at $23 trillion, up 6% since last year.  These figures are before this latest $2 trillion stimulus package.  

You might wonder what effect this $US2 trillon spend, a 10% increase in US debt will have on global trade and power.   China, Russia and Iran are trying to have currency alternatives to the US dollar.  It has been said that the US invades countries that have tried to leave the US dollar system and Libya and Iraq are cited as examples.  We can only speculate as to why the US invades countries.  But it is a plausible theory.  The fact that the US is the world’s reserve currency gives them a power that they would not have if it were not so.  They have a global share of GDP that has declined from a transitory peak of 35% at the end of WW2, to about 28% in 1950, 15% in 2018 and still declining.  Managing the coronavirus epidemic badly could hurt them a lot, but it looks likely.

The shutdown of economies will have a big dislocating effects on economies and is likely to favour countries that manage the epidemic best.  Attempts to separate the economy from the health issue are likely to be spectacular failures.  The US seems to be managing the epidemic very badly with its privatised health system and administrative complexity, and also seems to be trying to separate the economy from the health aspects.  And if the US stumbles, it has global implications for Australia, and while the UK now has its attention on the coronavirus epidemic the fallout from Brexit will play on under the radar.

We live in interesting times.  Let us hope that we survive them.  It seems that we will need a more self-sufficient foreign and economic polices.

www.smh.com.au/world/europe/on-the-ball-how-the-uk-s-80-percent-salary-subsidy-works-20200326-p54ede.html