As the end of the world’s strictest lockdown nears, attention is turning to life after Covid-19.
The coronavirus may not be defeated anytime soon, but a good deal of thought is needed about how to repair the destruction the virus has already caused to the economy.
Unemployment will be well into double figures before the year ends. Treasury’s most optimistic forecast has unemployment peaking at 13.5%. Less optimistic scenarios have more than a quarter of the workforce on the unemployment benefit.
Even if a new wave of infection does not send the economy back into hibernation, New Zealand has not seen unemployment at even of the lower-bound of this range since the Great Depression. The impact on the wellbeing of Kiwis will be dire. Mass unemployment will increase the number of families suffering material deprivation. The population’s mental health will deteriorate. The scars will take years to heal.
Work and wellbeing
The solution is easy to state: the economy must get back on its feet. As it regains its footing, it will generate jobs. And work will provide salvation to those who have been victims of the Great Coronavirus-Recession.
Who could disagree with Finance Minister Grant Robertson when he expressed his “fundamental belief in the importance and dignity of work” before the Epidemic Response Committee last week? The link between work and wellbeing is inextricable. Work does not simply put bread on a family’s table. It provides a sense of hope, of community, and of achievement.
When the alternative is mass-unemployment, the Government’s recovery plan should have a singular focus: meaningful work. Productive endeavour is the route to a sustainable economy. As Princeton economist and New York Times columnist Paul Krugman famously said, “productivity isn't everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”
Krugman’s stricture must be kept front of mind when reimagining a Covid-19-free future.
A forest’s worth of words has already been written about this reimagining. Much of it is well-meaning nonsense.
Among the loudest voices have been those calling for greater government intervention in the economy. The state has an important role in helping the economy back to its feet (more on that shortly). But the Government must be cautious about intervening in the economy.
New Zealand has been there before. Kiwis my generation or older will remember it only too well. The Tourist Hotel Corporation, the Ministry of Works, Forestry Corp, Producer Boards, and so on. The state participated in the economy of New Zealand’s recent past as if the country were part of Soviet-era Eastern Europe. It was inefficient, uncompetitive and unsustainable. Little wonder that New Zealand’s economy crashed in the 1980s. The country must not repeat those mistakes.
During the Covid-19 lockdown the economy has needed massive Government intervention to keep it on life-support. But just because big government was needed to preserve the economy during its enforced hibernation, does not mean the economy needs large-scale government intervention during its revival.
To take but one example of the perils to which this path leads, consider recent talk from Shane Jones, the Minister for Economic Development. Jones may be well-meaning in proposing the Government regulate the log export market to force the forestry industry to process logs in New Zealand. But his views are both ill-conceived and dangerous. Jones is a politician not a business leader. He has no unique insight into the forestry industry. If the industry could more profitably process timber in New Zealand than export whole logs it would be doing so already.
Having our politicians try to pick business winners or regulate already successful industries will harm the recovery and cost jobs. Enough businesses will have failed and jobs been lost because of the virus. The Government must not add to the casualties by tilting the playing field against those who have survived.
Even more dangerous talk has circulated in Wellington about how the Government might avoid saddling future generations with a mountain of coronavirus-debt. The Government has already committed an extra $50 billion to support the economy during the recession.
Before the recession is over that number could be much larger. On its own, $50b of budgeted Government spending will increase government debt from a comparatively modest 20% of GDP to nearly double that. Government spending choices could conceivably see that number double again.
As the Greek and Italian economies have seen, government debt-spirals are dangerous. But the danger also leads to discipline. Just as with mounting household debt, knowing loans must be paid back forces Governments to make spending choices. To evaluate the costs and benefits of the latest spending scheme and select the most beneficial.
Wellington economist Dr Geoff Bertram has suggested the Government can avoid this debt trap by issuing bonds directly to the Reserve Bank and simply having the Reserve Bank print money. This approach avoids the Government being burdened with external debt. Bertram argues that in the current low inflation environment this money-printing can be done safely.
Well-intentioned as Bertram may be, this is magical thinking. History shows the “current low inflation environment” will not last forever. Printing money is the road to hyperinflation and economic ruin. Just think Weimar-era Germany, Zimbabwe between 2007 and 2009 and Venezuela today. In all three, massive government deficits led to hyperinflation due to money printing. Bertram’s plans are replete with peril.
Caution is also needed with climate policy. The economic transformation needed to meet net carbon-zero goals is costly. Policy settings must try to achieve the goal efficiently. New Zealand’s world-leading Emissions Trading Scheme provides the means to do this.
The Government must be disciplined and avoid policies that double- or triple-dip, such as costly but unnecessary subsidies or taxes. With the economy already on its knees, inefficient policies – however well-meaning – will keep it crippled. The cost will be felt most acutely by the jobless.
What should the state do?
Just because there is much the Government should not do, does not mean there is nothing it should do.
Its action-list is long. More than ever, Kiwi businesses need access to capital. The Government has helped by using the Crown’s balance sheet to support bank-lending to medium-sized businesses. It should do likewise for the tens of thousands of small businesses that together employ a quarter of the workforce.
The Government should also ease restrictions on foreign investment. New Zealand has always been a net recipient of foreign capital. The economy needs these funds now more than ever. Yet New Zealand’s restrictions on foreign direct investment are amongst the tightest in the developed world.
The Government should also look urgently at relaxing the regulatory burdens on businesses, big and small. Media companies should be permitted to merge. The Resource Management’s chokehold on development should be loosened. Local councils should be incentivised to streamline their consenting processes.
Creative thinking is needed at our border to safely reopen the economy to international students and tourism (starting with Australia). And to help New Zealand to trade its way out of recession, the Government must redouble its efforts to lead like-minded nations to secure the world’s rules-based trading order.
Beyond these recession-busting measures, education matters most for creating long-term prosperity for all New Zealanders. Yet a growing number of students leave school functionally illiterate and innumerate. The inequities of our education system must be reversed.
If we are to reimagine the New Zealand economy, how about a goal of building a highly skilled and innovative workforce, and an economy that delivers well-paid, decent jobs and broad-based gains from economic growth and productivity? After all, this is already one of the Coalition Government’s laudable goals.
But it will take more than good intentions. The road to misery is paved with them. Only evidence-based public policy will help New Zealand escape the catastrophe the coronavirus has visited on the country.