A few coronavirus economic policy points

I’m staggered at how the government and most of the media still seem to have a backward-looking approach to coronavirus, and the economic effects thereof.  When the New South Wales Minister of Health yesterday indicated that in his view successful containment was now very unlikely, one might have supposed this would be big news in New Zealand.  After all, not only are there lots of New Zealanders in Sydney, but lots of people travel to and fro each day, and there are no restrictions or isolation requirements on those travellers.  If –  and it is presumably still an if –  containment is not likely to be successful in Sydney then surely, given that we haven’t had travel restrictions up to now and are unlikely to put them in place on Australia, it isn’t likely to be successful here.  It was, after all, the Prime Minister the other day who talked (loosely no doubt) in terms of a “common border”.     But I haven’t seen or heard of any comment from any of our political leaders, and no media outlet I follow has highlighted the story even though –  if it is so –  it must have material implications for how life might unfold here very quickly.  (For example, there is a community festival just down the road from here on Sunday, which annually attracts 80000 people in a pretty confined space. I don’t go, but people who are planning to might want to rethink.)

On issues of substance most of our political leaders seem either missing in action or, again, mostly backward-looking, as if coronavirus is something that happened in China and we are now just working through over the next few months/quarters the economic consequences of what has already happened.   On the evidence to date it is far from obvious that the Prime Minister has what it takes to lead and effectively drive the national response to an emerging, highly uncertain, serious ongoing crisis.  The Minister of Health seems to be missing in action (which, one hears, is often how officials thought of him in normal times).  And who else is there?   Kelvin Davis? Winston Peters? Phil Twyford?   I’ve heard suggestions that Grant Robertson “gets it”, but there continues to be great reason to doubt that, whether in his speech last week, his Q&A interview at the weekend, or one with Mike Hosking this morning.  It is all focused on stuff that has already happened, and the outworkings of that, and not at all on the worsening outlook, and the near-certainty of huge disruption and cost when community outbreak becomes a thing here.    Thus he continues to talk about “measured proportionate sectoral” responses, when in reality much the economy is likely to be overwhelmed for a time by what is unfolding.  You get no sense of that from Robertson.

I was initially supportive of the travel ban the government put in place several weeks ago.  It seemed prudent, and of course the Chinese government had put its own restrictions on outbound tourism.  I see quite a lot of commentary about how that ban “bought us time” or “kept the virus out for several weeks”, and I guess in years to come researchers will try to unpick the evidence on that one.  But I must confess to being a bit more sceptical now than I was.  Canada, for example, had no travel bans of its own, and yet when I checked this morning they had about eight times as many cases as New Zealand…..and almost eight times the population.  (And are not far from Seattle).  Neither country seems to have done a great deal of testing, so it isn’t simply that one country was finding more because it was searching harder.   It is impossible to easily know the counterfactual, of course, but perhaps the horse had already bolted by the time the travel bans were put on?  Again, superfically it isn’t obvious that the UK experience (no bans) has been worse at this point than the Australia or US experience.

Consistent with my post yesterday, I remain deeply sceptical of sectorally-targeted or admin-intensive specific government interventions to assist.   I see that in today’s Herald Hamish Rutherford is championing those sorts of programmes, under a subheading “Govt must act now to help hurting sectors take heart”.   Frankly, it is never the government’s job to help firms or sectors “take heart”.  The head has to be what is engaged in times like this.     Debate around these issues isn’t helped by an ongoing refusal, pretty much all round, to call what is happening right now what it is: an economic recession.    We might not have hard data on that point for months (even March quarter GDP includes January where there was little or no effect) but here, now, in March it seems almost certain that the level of economic activity is falling.  It is almost certain to fall further, perhaps at times a long way.    Forget about every other sector, all the supply chain disruptions etc and just focus for a moment on travel.  These were some forward travel booking numbers for Australia published in The Australian this morning.

“Between Feb 24 & March 1, year-on-year, bookings were down 47% from UK, 52% from the US, 71% from Indonesia, 32% from India and 100% from China and Japan, along with widespread cancellations.”

Is there any reason to suppose the New Zealand picture would be much different?   Uncertainty is the enemy of new investment, and uncertainty –  pure uncertainty, not just risk –  is extreme at present.  At present, not even the Leader of the Opposition is willing –  quite –  to call a spade a spade.

In recessions, bad stuff happens.  Firms fail.  People lose their jobs.  Plans are wrecked or disrupted. Asset prices fall.  Government revenue takes a hit.  (Government financial assets fall in value: see NZSF).  It isn’t pleasant, and usually those who bear the brunt aren’t in any very direct sense causally responsible for what happens to them, or their firms.    Much of the argument for focused sectoral action –  there is a lot of this in Rutherford’s article –  is along the lines that unless all these firms and jobs are saved now, recovery will be materially harder than it needs to be: the capacity mightn’t be there to take up the recovery in demand.  But, again, all recessions are like that.  But it isn’t as if the capital stock is going away.  Motelliers in Queenstown might go bust – I saw one this morning quoted as saying he could cope with downturn in Chinese numbers, but it would be problematic if others stopped “and that now looks as if it is happening”.  But the motel will still be there.  A jetboat or paragliding or whatever company might fail –  and that is tough, the flipside of the success operators capture in unanticipated boom times –  but the physical equipment and the location are still there.  And since this seems to be a worldwide thing, even if staff have to move and look for other jobs, many (or a next generation) will be quickly enticed back for whatever drew them to (say) tourist work in the first place.

And while it might have been easy a few weeks ago to identify specific firms that had lost directly associated with the virus, those numbers are rapidly going to be overwhelmed as the effects spread across the entire economy  – just as surely, if indirectly, the result of the coronavirus, and measures to manage/avoid it.   In recessions, for example, property markets tend to do badly –  see the 15 per cent fall in real house prices in New Zealand in 2008/09 despite a 400bps fall in mortgage rates – turnover will drop etc etc, and real estate agents will quite genuinely be able to blame the coronavirus for the slowdown.

You simply can’t sensibly target each firm/sector in the economy.  It is why we have macro policy –  economywide instruments designed to do what can be done to stabilise the downturn (that may not be much) and then lay a platform for as fast a recovery in demand and activity as can be achieved.   As it is, it is simply bizarre that with all that is observably different since, say, December, and all that is pretty visible just down the track, our macro policy settings are barely changed:  short-term wholesale and retail interest rates haven’t moved, nothing about (short-term impacting) fiscal policy has changed, the exchange rate is certainly a bit lower (but a modest move by historical standards) and on the other hand it is likely that credit conditions are tighter than they were.   There is an urgency about action, but that action should primarily be focused at the macroeconomic level.

And, finally today, I have been wondering how one might do an analysis of just what economic price is worth paying, as a society, to try to contain/manage coronavirus.  The Chinese economy and society seems to have paid a fearsome price and yet to have successfully (for now anyway) kept the worst of the spread of the disease in Hubei province (for anyone doubting the logic, I found this thread from a China-focused researcher helpful).

Serious scholars suggest that if the virus were simply left unchecked, it might infect 40 to 70 per cent of the world’s population (say 50 per cent).  For all the uncertainty about the true death rate, assume for the sake of argument 1 per cent of those infected.  In New Zealand terms, that is a potential total of early deaths of 25000.

According to the Treasury’s CBAx spreadsheet, the value of a statistical life (price community would pay to avoid premature death) this year is just on $5m.   25000 people at $5m each is $125 billion.  However, the evidence so far – including the Chinese data –  is that the deaths are very concentrated among older people.   On the Chinese data –  which may have its weaknesses –  the median age of those dying looks to have been as high as the late 70s, whereas the median age for all New Zealanders last year was 37.3. Remaining life expectancy at 80 seems to be about a quarter of that at 37, so we can chop down that maximum possible saving (from avoiding premature deaths) to no more than, say, $31 billion.

But, of course, even that is too high, since the implicit assumption is that all those lives could be saved with appropriate policy responses.  And from everything I read that seems incredibly unlikely.  Often people seem to talk about using policy measures and costly private actions (distancing etc) to spread out peaks and reduce the intense, perhaps overwhelming, peak pressures on the health system, and thereby (a) reduce the number of deaths and (b) make the whole experience less intolerable for those who would die anyway and those who, while sick, live.   Obviously I have no idea how many lives might be saved in total, but no one seems to seriously suppose it is anything like all of them.  If it was half, it would –  all else equal – be worth spending $15 billion or so to avoid those premature deaths.

Of course, if we could reduce the number of those who got seriously ill (but didn’t die) as well, it would be fair to ascribe a value to that too, but if people are up and about again in a month –  or even two –  that number will be swamped by the costs of death, given that in many cases those getting the virus won’t themselves be that sick at all (bad colds seem to be “one of those things” in life).

This is mostly by way of leading up to the question of how large would be discretionary economic costs be.  Note that I emphasise the word discretionary.  What other countries do as a matter of policy, and what other individuals do as a matter of prudence/fear is largely outside our control.  Thus almost all –  the exception perhaps being around university students – the economic effects so far are outside our control, and so is the temporary collapse in the rest of our tourism industry currently getting underway.  We will pay –  in lost output –  those costs whatever New Zealand governments do.  If major cities in other countries shut down for weeks at a time, disrupting travel, supply chains, demand for commodities or whatever, we have no real control over that.   Annual GDP at present is around $300bn.  It isn’t hard to envisage a scenario, quite outside our control, in which GDP for this year as a whole is perhaps $10bn less than otherwise.  That is income/wealth that will never be made up, even if/when after the crisis we get back ont a pre-crisis path.

The big choices are likely to be around how early/aggressively our authorities choose to act in shutting down cities, discouraging (or banning) social gathering, restricting movement etc etc.  We don’t really have hard data for other places yet, but what we know of the Chinese data suggests that these costs too could be very substantial –  not only has much of China been closed for six weeks already, but they are a long way from being back to normal, and with no idea what sort of virus resurgence they would see if they tried.  Shutdown, possibly pre-emptively (if still possible), much of New Zealand at different times for, say, six weeks at time.  In doing so, you could easily cut GDP during those shutdowns by 50 per cent.  Even if things quickly got back to normal after that, you’d still be looking at, say, 5 per cent loss of GDP for the year as a whole.  5 per cent of GDP is $15 billion, lost and never coming back.

I’m not attempting to offer answers here.  There are so many imponderables, most especially about what difference the toughest sustainable measures can eventually make to the death toll.   But it would be good to think that some of those “brightest New Zealanders” Hamish Rutherford told us were beavering away on these issues have at least been trying to think about the options in a systematic cost-benefit sort of way (here I emphasise the past tense, since time would appear to be of the essence, and you would hope officials haven’t shared in their masters’ public-facing sunny optimism about the threats we face). But if they haven’t done it yet, they need to be doing so now, urgently.