The Covid-19 crisis can be summed up in one word: uncertainty.
Practically everything about this crisis is uncertain: whether there will be a vaccine; whether the virus will mutate and how; the true fatality rate; and the long-term health damage in survivors.
Nested on top of these public health uncertainties are political questions. Which strategies will different countries implement? Will they contain the virus or eventually give up? How might travel be restricted – and for how long? And which policies will the public support?
The economic uncertainties make matters worse. How long can developed countries continue propping up their economies? What are the limits to fiscal stimulus? How much money can central banks print until rising inflation forces them to change course?
Radical uncertainty appears on every front, at every level and in every country.
This is not a run-of-the-mill economic crisis with a clear playbook. This is a different beast. Remembering that, the economic forecasts emerging over recent weeks are absurdly straightforward.
All major banks in New Zealand are roughly predicting the same pattern for the coming months and years. According to them, the massive shock this year will turn into an almost equally sized economic boom from the middle of next year. The unemployment rate will peak in June 2021 before slowly falling again. Meanwhile, inflation will remain low at just about 1%. In Westpac’s most recent forecast, it will then slowly creep up to 2% by 2026.
Looking at these bank forecasts, Covid-19 appears to be a very well-behaved crisis. Except it isn’t.
To be fair, predictions like these are not the bank economists’ fault. With all the uncertainty, maybe their forecasts are even correct. At least it cannot be ruled out.
The deeper problem is if the economists are using models made for ordinary times, then their predictions will match the results of an ordinary short and sharp recession. But nothing about this new crisis is ordinary.
Instead of guessing the correct numbers for growth, inflation and unemployment, it is more important to look at the fundamental changes to New Zealand’s economy. The Covid-19 crisis has recalibrated the balance of power between government and the market.
The Marxists of old used to talk about capturing “the commanding heights of the economy.” Covid-19 has not quite helped to achieve this goal, but the role of government has expanded.
Some of that extended role was initially justified. The wage subsidy for example, despite its horrendous cost, kept employees linked to their jobs. Without it, New Zealand would be facing appalling levels of unemployment and economic disruption.
To its credit, the Government was quick to support individuals and companies getting into trouble because of the pandemic. And a good thing too.
However, the longer the crisis lasts, it keeps increasing the size of the overall government, the level of public debt and the burden on future taxpayers to pay all this back.
The effects of the crisis go well beyond the fiscal questions of tax, borrow and spend. Just as importantly, the crisis has allowed Government to take a more directing role in society.
On public health, Government is issuing orders beyond what any peace-time Government ever had to. It has used its powers to direct people’s movements. It could shut down businesses or direct them to do things another way. It could restrict human rights in pursuing its health objectives.
There were good reasons for most of these orders. However, even where there were not, the public was understanding and compliant. Not just in New Zealand, by the way. In Australia, a survey of Victorians showed that 72% support Melbourne’s 8pm-5am curfew, which makes you wonder if it is a nocturnal virus.
The New Zealand public too is not just supporting Government mandates. Kiwis are asking for the Government to take an active role. And for sure, Government need not be asked twice.
In the shadow of Covid-19, the Government has rushed through legislation and spending initiatives, not all of which are directly linked to the crisis. New Zealand now has new forestry regulation, tighter rules for overseas investors and spending on schemes such as green buildings for private schools.
Government has become larger, costlier and more willing to intervene. And it has done this not against the wishes of Kiwis but with their implicit backing. In opinion polls, the majority of New Zealanders support giving the Government more powers.
The outcome of this will be a structural shift in New Zealand’s economic order. From being one of the Top 3 freest economies in the world, New Zealand will likely lose this position over the coming years. Over the long-term, New Zealand could become more like a European-style mixed economy with a large state sector and higher debt levels.
Empirically, the link between economic freedom and socio-economic outcomes has been well-documented. The evidence shows, at least beyond a certain threshold, that higher government spending tends to reduce economic growth. This is particularly true where spending is allocated on political grounds and not subjected to proper cost-benefit analysis.
That would be bad enough. But the empirical research on economic freedom also shows how reductions in economic freedom are correlated with poorer public health, life expectancy, civil liberties and even happiness.
Which brings the issue full circle.
This crisis is characterised by extreme uncertainty. That makes it difficult to model and forecast. But the uncertainty also encourages Government interventions that will have severe qualitative effects on the economic order – and these are more important than the short- to mid-term quantitative impacts.
Though it is tough to reliably forecast what Covid-19 will do to key economic indicators over the coming years, the true legacy of Covid-19 will be for the Government to occupy the commanding heights of the economy once again. And make everyone poorer.