Coronavirus: Unconventional times call for unconventional economic policy

Dr Eric Crampton
The Dominion Post
23 March, 2020

When the going gets weird, the weird turn pro. Or at least that's what Hunter S. Thompson advised.

And the economic going has gotten decidedly weird.

Many countries including New Zealand have butted up against the zero-bound on interest rates, at which point conventional monetary policy ends and some of the standard results in economics turn into mirror-images of themselves.

Some parts of the US may also be close to negative prices for oil – at least according to reports from Bloomberg. The drop in demand for oil combined with strong increases in production from Russia and Saudi Arabia, and difficulties in turning off some of the pumping facilities in the US and Canada, means storage for North American oil will be in very short supply.

Pandemics can put us into weird bizarro-worlds.

That makes conventional policy a bit difficult. Normally, recessions are times for monetary accommodation and perhaps support from fiscal policy. But standard fiscal policies do little good in the current situation. Tax cuts or fiscal stimulus will not have their normal effects. As Columbia University professor of economics Wojciech Kopczuk put it, "What are you going to do, make me go to a restaurant that's shut down anyway? My marginal propensity to consume is close to zero."

Even a large push to upgrade infrastructure while cars aren't on the roads could hurt deliveries: rostering workers in a pandemic is hard and some supplies will prove hard to come by.

Professor Kopczuk makes a strong case for targeted assistance, focused on providing liquidity for businesses and assistance in making payroll; on easing restrictions on unemployment benefits; on providing paid sick leave; on compensating furloughed workers; and on helping people make their mortgage payments. Job-search requirements on the jobseeker benefit may be counterproductive when we are all supposed to be at home as much as possible.

The Government's initial round of support announced last week aligns with these ideas. Those needing to spend time in self-isolation, in quarantine, in hospital or assisting infected family members will be supported. Smaller businesses are being helped with wage costs. Larger businesses are assumed to have easier access to credit to see them through, but that might not encourage them to avoid layoffs.

Every government faces incredibly difficult policy scenarios without a playbook. They need to support incomes while not discouraging workers from shifting to areas with a sudden need for help. They must help firms survive while discouraging people from going out shopping. And they should massively expand capacity and capabilities in the health care system within overarching sets of regulations designed to assure safety through very slow and thorough processes.

It'll be easier to find unicorns than squaring all these circles. Building a playbook will be hard.

But there are a few actions the New Zealand Government could consider to make things easier.

The Reserve Bank last week announced it would suspend a few time-consuming regulatory processes during the crisis. Its deferral of tighter bank capital requirements will make it easier for banks to extend credit. But the RBNZ also announced the deferral of eight other regulatory review processes from the Review of Insurance (Prudential Supervision) Act 2010 to its cyber resilience guidelines. It rightly recognised it lacked the capacity to deal with those reviews and the consequences of the pandemic – and similarly for the banks and insurers overseen by the RBNZ.

Regulatory review processes and Parliamentary submission processes can be incredibly time consuming for both the Ministries and those affected by the process. And everyone has, or really ought to have, more pressing matters to attend to. It does not seem plausible that the best use of the Ministry of Health's time is reviewing submissions on the new vaping legislation. Parliament's Health Select Committee, when it is able to convene, should consider ways of getting partially trained medical students into the health system to help. Time spent on vaping is time not spent preparing for the pandemic.

Parliament should consider putting any non-critical legislative or regulatory processes into a form of quarantine. They can all be tabled until after the crisis.

The going has gotten too weird to let some of the normal business of government continue as normal. The Government must let what weird professionals we have – both in business and in government – keep a sharp focus on the immediate tasks. They need to be building the new playbook rather than running the old one.

The weird need the time to turn pro. We should give it to them.



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