Economics

Emergency Measures in Need of an Exit Strategy

It started with Mirko Bagaric in The Australian — “Release super to boost economy” — who, while justifiably railing against the superannuation funds’ fees, argued that allowing people to access 10 per cent of their super could inject up to $300 million into the economy.  Mirko has separately suggested that the actual amount might be $150 billion.

Treasurer Josh Frydenberg has accepted a watered-down version of this, which he thinks might inject $27 billion into the economy by allowing people to access $20,000 of their superannuation savings, interestingly, over two years, an indication that the malaise won’t be over soon. This is part of the fiscal package which is now at $189 billion. That’s 9.7 per cent of today’s GDP but considerably more down the road, with GDP contracting by maybe 20 per cent.

Much of the expenditure, that which seeks to cushion the costs to those worst affected, is sensible. But, even so, there has to be be an exit strategy.  We have doubled the dole, for example, but when do we return it to previous levels?

Alan Moran: How to make things a whole lot worse

Some of the money is conjured up by the Reserve Bank, which is buying shares and bonds to depress interest rates.  This “quantitative easing” boosts stock and bond prices on some days (like Tuesday, March 24, when prospective increased intervention by the US Federal Reserve was a major factor) only to see share prices continue to decline on days when there is little buying by central banks.

All this money represents taxes that people must eventually incur, either to pay down the loans or to pay the interest on them.

The decision on superannuation is a particular anomaly.  When the government changes the superannuation rules to allow drawdowns, the super funds have to raise the money by selling their holdings of shares and bonds.  This drives down the price, thereby raising interest rates.  As the Reserve Bank is targeting interest rates, it must then enter the market and buy back the bonds, if not the shares, that the superannuation funds have sold.  Superannuation funds’ asset liquidations are therefore the equivalent of direct spending by the government itself.

So, the taxpayer is funding all of the stimulus. And in doing so is contributing to a diversion into current spending of the savings represented by people’s superannuation assets.  This undermines the nation’s future productive capacity. While most politicians harbour an inner Kevin Rudd-style yearning to gain accolades by spending other people’s money, the stimulus reveals the economic advisers at the Treasury and Reserve Bank to have been thoroughly indoctrinated by Keynesian notions of demand deficiency.

In the end we need to produce if we are to consume – we can deplete the pipeline of commodities but we need to replenish it, and this means government must be wary of any measures they take that discourage production of goods and services.  President Trump, in saying he wants the economy re-opened by Easter, is one of the few politicians who sees this reality. Indian PM Narendra Modi is one who fails to do so, as he seeks a complete lockdown, something Victoria’s Dan Andrews appears desperate to copy.

For the present, we do not have a shortage of demand and no pushing on that string will give the economy the fillip everybody hopes for.  The fact is that no amount of support will encourage people to fly and the government has forbidden us to visit cafes and theatres (which fewer people were going to patronise anyway) and will progressively close off other gregarious activities.  There are many things we’d like to buy more of – not only toilet rolls but also health protection, telecommunications, home entertainment, home delivered meals. But supplying these requires structural change in supply and this is retarded by restraints on the economy.

Bureaucrats are offering smorgasbords of economic closures to politicians, some of whom seem to be seeking to present themselves as the most aggressive in protecting the community’s health.  Each augmentation of protections increases the costs to the economy and hobbles the pace at which recovery can take place.

If our most senior advisers cannot comprehend the interconnectedness that characterises the economy, we are doomed to set up conditions that will mean a permanent reduction in the economy’s supply capacity, hence our income levels.

Alan Moran is the author of Climate Change: Policies and Treaties in the Trump Era

12 comments
  • Peter Smith

    Unfortunately, Alan, we are in the midst of governments intent on trumping each other by imposing new restrictions almost each day – urged on by the media which is comprised of mostly (safe-in-their jobs) morons waiting to pounce on any government doing less than the most gung-ho is doing. No time is being given to see whether a strategy is working to reduce the rate of transmission. The Imperial College report, which I previous wrote about, noted that critical-care infections would not peak until about three weeks after implementing the strategy recommended, As it is, governments are going way beyond that strategy yet waiting no time before continually upping the ante. It is madness. Only in Trump can we have hope.

  • pgang

    A actually feel embarrassed to be human now. I look at our cat and think, ‘you’re smarter than us’.

  • Lewis P Buckingham

    There is both a fall in production as well as demand, as my own business tells me.
    The happy, healthy, recovered need be identified and given a licence to go back to work in essential activities.
    Otherwise this 14 day lockdown of an essential business caused by potential infection will sweep them out of work as well.
    As an example a medical practice total shut down could be avoided by identifying those immune and they continuing to work.

  • Macspee

    So we stop elective surgery to leave space for all the corona viris patients which means hundreds of empty beds empty theatres and nurses and doctors with nothing to do. How many sufferers are being treated in hospital – 30 or so? What dolt dreamed this one up?

  • Lewis P Buckingham

    Police in Victoria are in lockdown because of potential infection.
    https://www.theage.com.au/politics/victoria/police-want-a-state-of-disaster-declared-to-give-them-more-power-20200325-p54dtq.html
    As the pandemic rolls on those immune can be identified and sent back to work, rather self isolating and seeing if they have a fever.

  • ianl

    I do wish I could say that the speed and gleeful enjoyment with which the politicians and senior bureaucrats have taken on hero roles has surprised me. But it doesn’t.
    This doesn’t mean they take glee in others’ horrible misfortune but rather reveals the irrestible appeal of the hero role to their vanity. Poor old Albo is really struggling with this need.
    The MSM have yet again shown what little skill they have apart from manipulation of words and sensationalist imagery. One of the measurements that does have some point is the increasing % of infected people – a perhaps meaningful daily ratio. Yet we are fed only the raw number of new infections with very little attempt at defining the ratio of increase. Of course, a “further 126 cases today” is more sensationalist than “an increase of 0.001% of the population” has been infected. Publishing the ratio is informative; screeching out the raw number is designed to sell advertising space.

  • en passant

    As an UNINTERESTED observer (despite being in the risk zone) here are some short observations:
    – The lockdown cure will most likely prove worse than the disease. I drove down our local restaurant strip today and saw FOUR ‘For Lease’ signs. Already businesses are collapsing.
    – ScoMo, Albo and the Greenfool Crew missed their vocations in US Army PR as they declare “We had to destroy Australia to save it”.
    – The only people who can lend us the stimulus ‘sit down money’ are the Chinese – who will soon demand we hand over our assets, land and businesses to pay them back. Like the aborigines before us, we will be pushed aside and replaced.
    – Could this just be the excuse they needed to see how far they could push ‘social control’ on a mass scale to remove individuality?
    – The death toll on Victorian roads so far this year is 75, Coronavirus Nationally = 9. Ban all cars and trucks to save lives” Honestly, I’m kidding …

  • Wyndham Dix

    Do contemporary politicians and their advisors know what constitutes a Pyrrhic victory?
    .
    Eisenhower and his commanders knew that many young men must lose their lives storming the beaches of Normandy on D-Day as a prelude to destroying Festung Europa. If one historian’s research is accurate, deaths on D-Day were around 3% of Allied soldiers, sailors and airmen who took part. https://www.history.com/news/d-day-casualties-deaths-allies
    .
    I sit under correction, but nowhere have I read that D-Day was regarded as a Pyrrhic victory. In an ideal world there would have been no need for the invasion, but the world was not ideal.
    .
    I am less sanguine about damage already caused to the world economy and hardships inflicted on millions who have lost, or will lose, their livelihoods and property as the consequence of decisions taken by politicians to “protect” us from COVID-19.
    .
    By all means protect the elderly and vulnerable as is being done, but let the rest of us get on with our lives in the certain knowledge that some will contract the virus but fewer succumb to it. If hospitals become overtaxed, treat COVID-19 victims in equivalents of casualty clearing stations and field hospitals used by the military in times of war.
    .
    The many who survive will develop immunity to the virus. This will not be the case if we continue to wrap ourselves in cotton wool by political fiat.

  • Peter Smith

    ianl “One of the measurements that does have some point is the increasing % of infected people – a perhaps meaningful daily ratio.” Take you point about meaningful measures but when testing is becoming more widespread, the number of infections is not really meaningful. I would like regular updates on the number of cases in need of critical care. I consult worldometer each day – which I think is a pretty sound site – and the number of such cases worldwide is trivial -14,909; and in Australia 11. I take it that governments are not loudly broadcasting this information to keep us all on edge and ready to accept ever more stringent socially-isolating medicine.

  • DG

    Cats aren’t smarter than us they are just so darn dumb, they look smart.

  • Tezza

    Alan notes that “Bureaucrats are offering smorgasbords of economic closures to politicians, some of whom seem to be seeking to present themselves as the most aggressive in protecting the community’s health.”

    The problem is actually worse than that in terms of the dynamic result of misaligned incentives in our federation: State premiers and Territory chief ministers feel they can only gain by breaking ranks with the ‘National Cabinet’ to rush implementation of more aggressive but increasingly costly measures, knowing that there will be no measure of those measures’ effectiveness at the margin. But their massive costs spread over all jurisdictions through copying, while the budget costs of trying to mop up the damage fall exclusively to the federal government, which remains solely responsible for the future borrowing and tax increases that the States have triggered.
    The misalignment of incentives can be thought of as the political consequence of vertical fiscal imbalance.

  • en passant

    hope I misheard today’s latest government brainf**t that landlords should give a 3-month rent-free period to tenants whose businesses have been compulsorily closed. How nice! I am a landlord. I rent out a property for $5,000/month. Therefore as an idiot virtue-signalling Samaritan I am being asked to forego revenue of $15,000.
    Naturally, even idiots can see the flaw in the ScoMo & Dangerous Dan’s plans to save businesses?
    If you cannot see it, here it is:
    1. My outgoings for mortgage, rates, agent’s fees and repairs average just under $3,000/month
    2. As a self-funded retiree I use the difference to supplement my other investment income (which has mainly dried up).
    3. As a greedy, rich, self-funded retiree who spent 45 years saving to reach this position I am not entitled to Centrelink or financial assistance.
    So, I now face a short term future of not only no income, but outgoings that will not stop.
    I used to despise the stupidity of politicians, but their latest idea goes beyond that

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