Take a macro approach

There has been quite a bit of coverage in the last few days of business lobbies calling for special assistance to cope with the economic effects of the coronavirus to date, and signs too that the government is proving at least somewhat responsive.  In the Herald the PM is quoted as saying that the government will waive the standdown period –  typically a week – for those seeking to move onto a welfare benefit “because of the impact of Covid-19”.  In Parliament yesterday (emphasis added):

Rt Hon JACINDA ARDERN: I’m not going to make a prediction that no other economist is currently making or, indeed, Treasury. We are not predicting, but we are planning and preparing, because that is what we, of course, need to do in order to support those regions, in particular, that are most likely to be affected. We know those are likely to be—Gisborne, Hawke’s Bay, Tasman, and Marlborough are amongst the most exposed, particularly looking at the—

Hon Simon Bridges: It’s every small business in New Zealand.

Rt Hon JACINDA ARDERN:—impacts in China. But some analysis, obviously, Mr Bridges, demonstrates those impacts are particularly acute there, and then across the board for the likes of tourism and hospitality. In each of those regions we are looking to create tailored packages of support. That’s something that our Minister for Economic Development is currently working on.

In addition to all the other firms/sectors looking for assistance, there is a full page article in the Herald on the difficulties facing the tourism and hospitality sectors, including calls for wage subsidies.

Unfortunately, much of the way the Prime Minister talks about the issue –  and the Minister of Health on the health side –  suggests that the government is still acting as if coronavirus is a very bad thing (which, of course, it is) which has already happened somewhere else –  affecting our economy of course – and now it is really just a matter of time, albeit perhaps quite some months, until things get back to normal.  (It all seems consistent with the tone of the Director-General of Health who continues to play down the health risk in New Zealand, and – in public anyway –  to take the most short-term positive spin on almost every story/risk.  That matters because it suggests something of a government-wide mindset, with implications for the economic and economic policy issues that are my focus.)

In all the talk of this subsidy, that specific assistance, this tailored regional programme, no leading politician or official seems willing to front the fact that, difficult and costly as things have been so far for some individuals/firms/sectors, the only prudent approach is to plan on the basis that things will most probably get a lot worse before they get better.  It is fine to work on the basis that in a couple of years time things are likely to be more or less back to normal (as regards health/virus etc).  But two years is a long time away, and there is likely to be a great deal of disruption, uncertainty, and loss before we emerge safely on the other side.

Even if somehow the Ministry of Health was right and significant community outbreaks really don’t happen here, there still seem to be plenty of new and worsening ones abroad.  Even if China inches back towards normality –  and you could check out the new Caixin article on people just making stuff up there, about economic activity, to comply with top-down expectations –  much of the rest of the world seems to be heading in the opposite direction.  It isn’t just supply chains involving China, or tourists from China etc that we –  and others –  need to worry about.   If we do get significant outbreaks here we will have a whole new level of domestic disruption and loss (economic and other) as the measures –  imposed and self-chosen –  to manage the situation take hold.   Whole cities could come to a near-halt for non-trivial periods.

Frankly, it seems bizarre to be focusing on “tailored region specific packages” in this environment.  It looks remarkably backward-looking (focused on the stuff that has already happened), and to be not taking anywhere near enough account of the wider risks.  I presume somewhere in the Beehive or the upper levels of officialdom some people actually realise the magnitude of the issue/threat, and are taking it into account in their advice on specific policy proposals.  But there is no sign of that stuff in any of the outward-facing talk –  least of all from the Prime Minister.

Much of the talk seems influenced by the earthquake experiences, both Christchurch (especially after February 2011 and Kaikoura).   In particular, people talk positively about the short-term wage subsidies offered to some firms to help keep people connected to the labour market etc.  I think that, in passing, I have even referred favourably to that experience myself.  But it is a bad way of framing the current issue for a number of reasons:

  • trivially, Kaikoura was/is very small.  Whatever was done for people/firms there had no economywide implications,
  • second, and much more importantly, the nature of the shock and economic loss being dealt with was known.  Thus, although people fairly point out that there were aftershocks, and even worries about severe ones, when there were major earthquakes in Christchurch no one worried that there would be a big one –  or Rangitoto erupting –  the followng week/month in Auckland.
  • third, allowing for the aftershocks point, the worst event had already happened by the time the special programmes were launched.  We couldn’t be 100% sure of that at the time, but it is still a stark contrast to the situation we face now re Covid-19,
  • fourth, the earthquake shocks were known, from day 1, to be going to trigger a really significant boost to aggregate demand (repair and reconstruction) in and around the severely affected regions.  Activity might not resume quickly in some individual and specific sectors, but before too long there would be lots of jobs in total, and thus lots of wider demand.
  • fifth, even Christchurch was only about a tenth of the country.

By contrast this time, we know very little, and what we do know does not portend any great boost to demand and employment just a little over the horizon.   There could –  quite probably will – be very serious disruptions to come, perhaps across the economy as a whole.  Individual sector interventions are unlikely to scale effectively, and interventions announced now –  perhaps in some generous cast of mind – could very quickly be overwhelmed by the pressures of more serious widespread disruption and losses, whereby those “lucky” enough to be hit first-  in this case those who made themselves most dependent on one market, the PRC –  get the easiest largesse.

(I’m not even convinced of the case for suspending the standdown period.  This is a recession. We might hope it is brief.  It might be no one here’s fault. But most recessions aren’t in any way the fault of most of the individuals who bear the brunt of the downturns, and actually the best thing for people thrown out of work early is to reconnect to the labour market as soon as possible, perhaps before the labour market in aggregate gets much worse.  But this particular policy, because it can presumably be applied more or less with the flick of a switch (if it is avowedly temporary, and not tied to proving a Covid-19 connection), bothers me less than suggested admin-heavy targeted interventions, which might make good political theatre this week, but which could quickly look rather beside the point.)

And it isn’t as if these sort of tweaked tools are going to go to the heart of the issues either.  As I noted yesterday

Even direct short-term assistance won’t do much to slow the deterioration of economic aggregates –  won’t summon up more tourists, won’t fill gaps in supply chains, won’t offset the decline in spending if/when social distancing becomes more imperative.  By and large, we are stuck with whatever deterioration in economic activity the next few months bring, most of which will be events almost totally outside our control (overseas economic activity and the spread of the virus abroad and here).

If specific tailored micro policies aren’t the thing, that isn’t to suggest policymakers should be sitting idle.  Rather, macroeconomic measures with systematic whole economy effects should be in play, either deployed decisively right now –  in the case of monetary policy, which is easy to reverse later if necessary – or ready to go almost instantly as/when the full severity becomes a bit more generally apparent.  If it were me, I’d be suspending the forthcoming minimum wage increase as well –  whatever demand effects champions of high minimum wages might tout, in this environment raising already-high minimum wages will worsen the labour market ruptures politicians etc purport to be concerned about.

I don’t have a full suite of measures.   I still think a temporary reduction in GST has a lot of merit.  Perhaps a temporary (but significant) reduction in one of the lower income tax rates might have appeal –  and would ensure that the income effects to households were distributed relatively evenly.  (Incidentally, for any MMT champions out there, financing is pretty much a non-issue for now present, with long-term nominal bond yields at 1 per cent.)    And despite my general and long-term support for a substantial reduction in New Zealand’s permanent non-citizen migration numbers, I would be very careful to do nothing now to drive those numbers further down (they are likely to fall anyway), consistent with my point that the short-term demand effects of migration materially exceed the supply effects.    And there needs to be some hard-thinking about the potential private debt consequences of the (likely) substantial income losses –  that doesn’t just involve heavying the banks.  Banks, quite reasonably, will be more cautious, many borrowers will inevitably be less able to meet their debts. (The Chicago academic John Cochrane has a piece worth reading on some of those issues.)  (Hobbyhorse issue of mine, but very relevant: there should be action as a matter of urgency to addres, and greatly ease, the effective lower bound on nominal interest rates.)

I’m sure there are other options, that are focused, can readily be kept temporary, and which might plausibly have significant demand effects concentrated this year and perhaps next.    The design of a package with such measures –  econonywide in focus –  is where our economic boffins and their ministers really should be devoting all their design etc efforts at present.

If I’m underwhelmed at the political leadership around these issues, it is perhaps even more worrying to look at the officials and agencies supposed to support the Cabinet.   Our Treasury is led by someone with no New Zealand experience and (more concerningly, as I noted when she was appointed) no experience or background in national economic policymaking.  Our Reserve Bank is led by someone with little demonstrated capacity for deep and innovative thought, who has displayed more interest in things he isn’t responsible for than those he is.  MBIE is led by a former HR manager, and I could go on.  Perhaps there are some exceptionally able people the next tiers down, helping frame big-picture thinking and proposing well-thought-out specifics, but the names don’t really spring to mind.   Our public service (led from SSC, enabled by governments) hasn’t encouraged the fostering of those sorts of capabilities.  Our institutions have been allowed to run down, under successive governments, and we pay the price for that in tough and highly uncertain times.

I suppose I once got the idea that getting on the front foot might unnecessarily scare the horses (voters) and look “panicky”.  That might have seemed a plausible story a month ago, just like the “contained to China, to all intents and purposes” story might have seemed plausible then to some.   But it doesn’t now.  Politicians, officials, and the public need to recognise that things –  including economically –  are likely (few things are ever quite certain) to get much worse at times in the next few months before they get enduringly better.  Policy planning needs to be done on that basis, and “tailored region specific plans” don’t really seem like to cut it, or to be a wise use of scarce policy and adminstrative talent (or political capital for that matter).

13 thoughts on “Take a macro approach

  1. Great piece Michael I think you are justified in having little faith in the current leadership including the relevant senior bureaucrats. I think this crisis is going to need a suite of responses including your suggested GST level adjustment, selected industry support and in time a series of direct cash payments across the board, the extent of which will probably need to be flexible on an as required basis.


  2. Michael I share your concern re the macro situation and the seeming lack of urgency or worse any understanding of how serious the situation actually is, within the Wellington bubble. I think Covid-19 itself in NZ (notwithstanding it may turn into something dire for NZ cities and the citizenry) is now almost a sideshow to the main game which is the steepening negative impact on the micro and macro-economy. The complete shutdown of factories in China for LNY and the very slow and limited start-up since is already affecting NZ supply chains. Exports rely on empty containers that have arrived full from China. Those trade lines have not re-established and with the slow/glacial spool up in factory operations in China, congestion and limited staff at Chinese ports, resumption of normal service will take months.

    The log congestion in China and it’s back up through the supply chain to the forests is illuminating.

    In NZ cows are being milked (or not with the drought), apples and shortly kiwifruit are being picked and things down on the farm are proceeding normally on the production side. Without a continuing supply of empty containers being delivered (ex import) the stock of empties in NZ will quickly run out. Ship calls are already being cancelled or diverted because the lines don’t have a reason to call as they have no imports to discharge.

    As you note the issue is being dealt with as a specific health matter – when it’s already moved on from there as a policy matter. Whether NZ gets 3 more or 300 more cases, Covid-19 has already wreaked havoc through the severe disruption to interconnected global supply chains. NZ’s reliance on exports to underpin the economy (and particularly to China) is now a massive well-being issue for the country. Personally I think your suggestion of an immediate reduction in GST has a lot of merit.

    One would hope that Treasury and the Reserve Bank have their heads out of the petri dish and are inquiring closely the major players in NZ’s supply chain for their input. Ports, shipping lines, forest owners and contractors, meat processors, major exporters (Zespri, Fonterra, Silver Fern Farms (useful as they have Chinese owners), etc), major importers, (The Warehouse, healthcare product importers and suppliers etc) to build a picture and develop tactics to cope.


  3. I just got paid today. That covers me until the next pay in 2 weeks. Most of that goes into savings anyway as my expenditure is quite low on a daily basis. My rents on my Investment properties went up between 4% to 8% for my 11 properties and every indication is that the entire NZ property market is rebounding nicely.

    My Kiwisaver got hammered from 17% per annum return to 7% per annum return’s in a week of freefall but still positive so overall still ok.

    Obviously no European or any travel this year which does cost me around $40k each year which goes towards savings. So even though we see fewer international travellers that is likely offset by most Kiwis are not travelling overseas either.

    No real cause for a panic. No reason for the OCR to fall. Keep the powder dry.


    • Time will tell, but I expect we’ll see house prices falling soon. Huge int rate cuts in 08/09 didn’t prevent that.

      If both NZers and foreigners stop travelling that suggests quite a hit to GDp all round, especially if as you suggest you are doing the money not spent just goes to savings.


      • The huge interest rate cuts were just way too fast and was a major error by the RBNZ. The problem was that it was rather sudden surprise move after the RBNZ had already threatened higher and higher interest rates. Many property owners had opted to fix at 7% to 8% for 2 to 5 years. The sudden swift fall left many unable to respond stuck in Fixed Interest rates with massive break fees. The banks just took the opportunity to rake in record profits while for many households trapped until the Fixed loan period expired which for most was at least 2 years down the track. The Break fees amounted to almost $70k for one client.


      • If Kiwis are not spending overseas then you still have to spend in NZ. The NZD buys more GDP activity through the hospitality sector in NZ than in Europe, still leaving plenty for the savings account. A large chuck of the expenditure is the airfare to Europe.


      • Right, but airlines are a non-trivial element in GDP. When air travel temporarily dries up – as it seems to be doing – that will be reflected in a material dip in GDP.


  4. Tax deferments are needed on a case by case basis. Cashflow is critical. The government has to borrow anyway to support the economy through this hole. Its either tax deferment & maybe keep some more jobs up & running or pay it out in benefits anyway.

    I personally don’t like MMT (helicopter money) or necessarily universal income (I prefer to see it targeted) but one can see a growing case for it down the line.

    Roll on the vaccine. (95,411 total cases with 80,400 in China & 15,000 outside)


  5. “” And despite my general and long-term support for a substantial reduction in New Zealand’s permanent non-citizen migration numbers, I would be very careful to do nothing now to drive those numbers further down “”. I appreciate your consistency.
    So INZ should start processing the deliberately created backlog in applications for permanent residency. It should be done because it is the right thing to do – leaving applicants for residency trapped in a bureaucratic quagmire is cruel [our Prime Minister’s watchword for good government is kindness]. Secondly it should also be done because NZ risks losing its most talented immigrants. And it should be done because it may give our economy a mild lift just when needed.
    The overcrowding in Auckland: families living in cars, tents, garages, the strains on our infrastructure, the congestion, the incessant rorts related to low-paid immigrants and all the other negative effects of too rapid a growth rate is mainly caused by the number of work visas that significantly outnumber applicants for permanent residency. What will happen to them? NZ has less resentment of migrants than other developed countries – will this change when NZ citizens are unemployed during a recession? Would it be wise to stop issuing new work visas? If necessary unilaterally revoking some of our international agreements until this epidemic is over?


    • Just as a quick caveat to that, remember that most people applying for residence are already here, so altering processing speed won’t much difference to demand etc over the relevant horizon.


  6. Michael I am interested in your GST suggestion. A massive revenue reduction $1 bn per percentage point with very diffuse individual benefits.

    Why would you prefer that over – say – cash payments to low income households?


    • Largely because it has a substitution effect as well as an income effect (see Buiter’s discussion in the link in my Monday post) but also because it is mildly progressive, and operates pretty pervasively. I’d rather not confuse stabilisation policy with heavily “distributional” policies.

      I also think something like a temp GST reduction is going to be more politically tenable ( in a context where ideally things shld not get too partisan) esp as something that would need to be in place for some time rather than a one-off. One-offs don’t meet my criteria for what this situation is likely to require.


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