Coronavirus policy and economics: 24 March

And so the die is cast and the motley crew (of, I’m sure, well-intentioned people) that make up our government have decided on a lockdown  Liberties are shredded, but I guess people will still be free to shop at The Warehouse.  It seems a curious business.

We must hope the strategy “works”, but the problem seems to be that (a) it isn’t clear there is a strategy (just another tactical choice), and (b) it isn’t really clear what “works” means here.    The Prime Minister yesterday referred to those standard worst-case types of death numbers, that have been around pandemic planning for years.     And she talked in terms of how the lockdown should probably dampen the local outbreak.  But there was no sense of how we get from a four-week lockdown to the end, when the virus is no longer a threat (whether the hope of a vaccine is realised, or because a less-lethal version just becomes part of the normal mild perils of winter).  In particular, there is no sense of how many lives any particular set of policy responses are credibly likely to save, in a world population with no underlying immunity.   I guess the only honest answer is that no one knows, but it would be good to have sense from the government of the central estimates they are working with, and the confidence bands around those estimates.  Without anything like that it is all but impossible for citizens to reach a view on the merits of any planned set of interventions, or a strategy.

There are various efforts around to attempt at least sketch outlines of a cost-benefit analysis (though typically of “policy intervention” defined very generally).  Some people simply object to such exercises as somehow immoral in the face of the threat.  I disagree.  I think they can help frame some of the discussions society has to be having.  Even if, say, you or I might give everything (if necessary our very lives) to save our children, that simply isn’t the way public health policy (or any other area of public policy for that matter) actually works.   We make choices about costs and tradeoffs, whether it is about speed limits, food safety or (closer to this blog) bank capital.

A few weeks ago, I tried to tease out, in a back of the envelope sense, some of how one might like to think about the issues (towards the end ofthis post).   A couple of extracts

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, there are other potential benefits to be added, including any sustained impairment of health (eg lung functioning) for some of those who recover.

Probably three weeks ago $15 billion seemed a really big number.  Sadly, now it is chicken-feed relative to the output losses New Zealand will suffer this year.  The loss in the June quarter alone could end up getting on for doubling that, if the lockdown gets extended much.

But in any such discussions, it is also worth bearing in mind that we need to think about marginal effects on both sides of the “equation”.   How many lives will be saved over the next couple of years by the planned set of interventions vs the additional economic cost from the New Zealand’s government’s interventions.  Both what the rest of the world’s governments do, and what the wider public (here and abroad) do anyway isn’t, in principle, relevant to the calculation.    And a great deal of the economic losses we are now facing, and about to undergo, are already baked-in.   There would be no tourists anyway, as just one example.  There would be massive investment uncertainty.  There would be increased physical distancing and postponement of events, and so on.

It is hard to put numbers on any of these items, but the discipline of writing the assumptions down, expressing realistic confidence intervals, articulating the basis for your judgements on each line item, and then disclosing that material to the public should be a part of what is going on now  It is also at least partly about accountability, for some staggeringly big choices governments are making now, and look set to continue to make in some form or another for some time to come.    I don’t have a strong view myself –  interesting question to ask is whether, if there was a referendum today you would support the lockdown – but confidence in judgements being made is only likely to be enhanced if there is good, robust analysis underpinning those judgements.

(And here we should make only little allowance for the mad rush; they’ve had two months to learn from Wuhan and prepare and yet in all too many fields of government it is increasingly clear how little that time was used for serious bad-case planning and preparation.  That seems particularly evident –  perhaps just because it is my focus – in the economic policy area.)

Of course, the more immediate issues now are around economic policy.   The interviews on the morning shows this morning suggest an announcement from the Minister of Finance later today around credit.   Unfortunately, there is still no hint in any comments from the Governor or the Prime Minister that they are yet willing to do what is really needed.   Simply being willing to extend credit to firms might be helpful, but it isn’t really the issue, because for many firms it simply won’t be worthwhile to borrow, taking on more debt against the totally unknown horizon at which something like normality might resume (hint, it isn’t after four weeks).     We need a comprehensive system of income guarantees (80 per cent of last year’s net) for individuals and for firms that stay fully staffed and capable, for the year ahead.   Just possibly, the guarantees would not prove to be needed for that long, but that is really beside the point now: what matters now is uncertainty and expectations, and not just for the next few weeks (still what the wage subsidy is doing).  (My macro-stabilisation package here.)

This sort of guarantee is the sort of policy (“ACC for the whole economy” as someone put it to me) that will help buy a reasonable amount of time, and give firms some confidence in a willingness to take on debt (while still leaving each firms’ owners to make their decision about likely future viability).  Is such a scheme likely to be expensive?  Sure, but in a sense we paid the premium already, in that low public debt over the last few decades.  We should expect the (unwritten, implicit) policy to be honoured, not obviously as some matter of law, but of charity and good economic sense.

The other thing where there is no progress evident at all is on securing a substantial easing in monetary conditions, and substantial relief of servicing costs (not so much the cash outlay as the legal liability) of borrowers.  On RNZ this morning the Governor was talking up all his tools, but it all really amounts to almost nothing.  He can do large scale asset swaps, and in doing so ease some pressures in specific markets.  But monetary conditions are tightening and they need to be loosening a lot.  He talks of the further tools he has at his disposal, but apart from easing specific stresses, they simply don’t amount to much, nothing like the scale of the need (and one of his own MPC, his chief economist) told us that just before the crisis really intensified).

Interest rates need to come a lot further down.  Business and household borrowing costs at present probably should be no higher than zero.   Even getting towards that would require the OCR to be set significantly negative.  That can quite readily be implemented.  It really needs to be done, and the indifference – and bluster, bordering on outright misrepresentations –  from central bankers, including our own, on the failure to adjust interest rates is frankly quite incredible, ie almost literally unbelievable.  OCRs don’t stop being effective at zero, it is just that too many central bankers stopping trying (while doing lots of handwaving).

A former colleague, from mostly a banking supervision background, left a comment yesterday disagreeing with my call for negative rates.

geof m

I’m sure (well, know) he isn’t the only sceptic, here and abroad, but that isn’t going to stop me championing an idea whose time is long overdue (after all, the near-zero bound only exists because of government regulatory restrictions and monopolies –  it isn’t a given of nature).

What to make of Geof’s specific arguments?

First, I don’t accept that it would be destabilising to the financial system at all –  if anything, at the margin it would assist financial stability by shifting the burden from borowers (increasingly indebted in most cases) to depositors (time is offering no real return right now).

I also don’t belief that there would be anything like the sort of flight to Australia Geof suggests.  After all, exchange rates –  even NZD/AUD are volatile enough and transactions costs high enough – to swamp any possible small interest gains.   Perhaps more to the point, in a floating exchange rate system, unless there is a run to physical cash – and recall that under my model cash would be more expensive to purchase/withdraw –  the total deposits in the banking system do not shrink because someone seeks to withdraw money.    For every seller of NZD there has to be a buyer.  And, frankly, the more people wanted to sell NZD at present, the better –  a materially lower exchange rate is one more helpful part of the stabilisation package.

Finally, Geof also notes that lower interest rates won’t do much to boost spending right now.  That is, of course, true and a point I’ve been making throughout.   The point of policy right now is not to boost spending (the time for “stimulus” will be later) but, in this case, to ease servicing burdens materially, and to help stabilise and reverse the falls in medium-term inflation expectations that risk materially complicating the recovery phase, by starting us off with higher real interest rates than those we went into the crisis with,

There is always resistance to paradigm shifts, and too many central bankers and the like are operating within a paradigm that simply isn’t open to negative interest rates –  even though in New Zealand we went for years with substantially negative real rates a few decades ago.  That really now needs to change, and fast.  Our Reserve Bank could show the way.  Our economic policy position, our stabilisation options, would be improved if they did.

UPDATE: I remembered that I meant to mention an idea a reader passed on this morning.  Since many many businesses will fail anyway, and in many cases that may involve personal bankruptcies, in respect of personal guarantees of business borrowings, in this exceptional climate is there a case for considering cutting in half the period in which someone who goes bankrupt is unable to be involved in running a business.  Like everything in this crisis, there are risks, but it might be an option worth some officials thinking about.

27 thoughts on “Coronavirus policy and economics: 24 March

  1. Problem is, even if this policy is successful, in four weeks the world will be an utter mess and there will still be no vaccine (presumably). So even if we get some sort of normality here in NZ, our ability to interact with the rest of the world will be crippled.

    No tourism, no education services. A permit to leave the country and quarantine on return. I can see all of that in our near future.

    Liked by 1 person

    • Yep, and thus v little of the observable cost is truly marginal to NZ govt calls. Different at a global level, but there there is no credible coordinating device, some deus ex machina to impose a standard model across the world.


      • I can understand locking up the borders but level 4 lock down of cities, China communist style is just dumb. We are relying on a Donald Trump timeline that this is a Chinese Virus but the widespread global community spread without a patient zero in most countries around the world suggests that the origins might be longer than the 3 or 4 months but more a 12 months to 15 months spread in perhaps starting in USA or perhaps Italy as the point of origin.


    • After the four weeks (or 8, 12, …) when there are no new cases seen in New Zealand, then what? Almost everyone in the country will still be susceptible and likely that a vaccine will still be years away.
      Covid-19 will almost certainly continue to circulate around the wider world, probably indefinitely, so there will be an ongoing risk of reintroduction. but then to a country trying to recover from a devastating knock to its economy.
      Back to Square One? Repeated lockdowns? Ongoing quarantining of incoming travellers? Ultimate breakdown of any containment effort?

      I suspect that when looked at from far enough in the future to be objective, the initial UK strategy of “negative quarantine” – protecting the most vulnerable which allowing herd immunity to result from community spread (albeit slowed to flatten the peak), might have been the better choice, although it was too politically unacceptable to be tried.

      Liked by 3 people

      • Bob, the “negative quarantine” idea was not about culling over 70s, but an attempt to protect them (and other highly vulnerables) from infection through the acute phase of the epidemic, after which they would be protected by the quenching of the epidemic through the development of herd immunity in the general population.

        Liked by 1 person

      • Bob, a “culling of over 70s”, as you put it, would free up a lot of capital, which might boost recovery through people spending their inheritances. Great from a macro view, bad from a micro view.

        Liked by 1 person

      • Is four weeks sufficient time to set up testing, tracking systems etc. so if new cases do appear, they can be controlled? I assume +70’s/respiratory condition remain cautious but can access ICU, borders remain shut but behaviour changes (mostly hand washing before eating) and knowing someone with ‘COVID’ becomes less of a fear factor? Pipe dream?


      • JMK – taking the optimistic view that NZ gets on top of Covid-19 on April 24th and there is better and faster testing then we could return to ‘normal’ in so far as our then economy permits. We would be under pressure to bring stranded New Zealanders home and there may be asymptomatic Covid-19 carriers so there would be a risk of a second outbreak. In that situation there could be one significant change to our society: a need to enforce the potential rapid tracing of contacts. Everyone should be obliged to carry a modern smart phone that records all travel for the previous fortnight and the police permitted random checks that it is being carried and is switched on. If the information is held on the internet then a database search would list everyone you have been in contact with and where and when. Another loss of privacy but acceptable to me. Ethical implications.


      • That policy would be utterly unacceptable to me and I would defy it.

        As I keep noting we some clarity – each and from the govt – as to what things are more important than public health.


      • Public health capacity is being ramped up many times which will mean we will be able to cope with more cases before going back to level 3 or 4 in the months to come. We are learning from countries
        like Singapore.

        I reckon our government has been slow to understand what’s needed but they are catching on fast.


      • Public health does result in restrictions on the individual. From which side of the road you drive on, whether you wear a seat belt, use your mobile phone while driving, drive through red lights, etc. There is a possiblity that Covid-19 will change what society is willing to accept. We may make cash illegal. If you have experienced the problems that Italy is currently experiencing you may be willing to tolerate the face recognition, AI and big data search software that China is developing so a new patient can have all their contacts identified instantly rather than the time consuming and fairly inefficient methods used today. We have at least 29 days to think about it.


      • What you say is no doubt true and yet exactly what i worry about. The risk of a drift towards Chinese style surveillance state was already becoming an increasing concern well before this disaster.


      • At one level the state surveillance society is only what happens in most villages worldwide – there are no secrets in a village. Which is one reason young rebels leave for the city.
        I am terrified by the surveillance developments in China particularly bearing mind every large database contains mistakes and an AI system will inevitably be configured to achieve optimum results not eliminate the mistakes. China with its social credit system is obviously frightening but of similar significance Apps developed in the west are doing much the same tracking our movements and purchasing preferences.
        My examples of public safety generating laws enforced on drivers show how arbitrary such rules can be. Another example would be enforcing bicycle helmets; legal in some countries and not others but it is very hard to remove a safety measure. [Or at least it is difficult when it applies to the public; didn’t Pike River occur because safety rules had been relaxed?] After Covid-19 our way of life will be changed.


    • I’m not so sure about tourism. Obviously it is dead today and after four weeks it will be hit very hard but assuming NZ gets on top of this problem and the majority of the rest of the world doesn’t then national tourism can take its place – it will be the patriotic thing to do. And international tourism is not necessarily dead – NZ has the capacity to quarantine all arrivals (tourists, returning residents, new immigrants) in some beautiful resorts. We would need the equivalent of prisoners electronic tagging ankle bracelets and cheaper faster testing. Wealthy foreigners looking for a really long holiday in a country that is free from Covid-19 restriction (after their quarantine) may be attracted to NZ.


  2. Question re standing in the secondary market to buy Treasury Bonds @ 0% interest rate

    Could you not bid to buy @ negative (-)0.25% or even -0.50%


    • Yes, you could bid negative, but unless/until the RB is willing to reacknowledge the possiblity of a negative OCR going that far would just be a windfall wealth transfer to existing holders of those bonds.


  3. 4% death rate for 5m pop is 200,000 – this seems realistic with an older population, colder climate and few ICUs.

    “25000 people at $5m” with – 25,000 seems unlikely & would need sufficient social suppression over 18 months to keep the case load at any one time very low (given only 176 ICUs)

    200,000 * $5m per life = 1Trillion vs “25000 people at $5m = 1.25bn”

    Also I dont agree with valuing remaining life at a lower price.
    That type of analysis has all sorts of consequences, e.g. it would be more economic to kill off the older population than pay them superannuation. What makes us human is our attempt to value everyone equally.
    I also doubt that our current health spending is sufficient (i.e. we do let some older people die) due to funding limitations if one does a cost / benefit assessment of all government spending across all sectors.

    As you note the issue for NZ now, is having gone into lockdown what is the exit plan.

    Hopefully by the end of 4 weeks there are no cases left.

    NZ should return to semi-normal but with social distancing of 2m still required & maximum crowd sizes.

    Places like restaurants etc having to use disposible plates, cutlery, cups etc.

    All malls, libraries, council buildings, large office blocks etc required to have thermal scanners.

    Rigorous testing would be needed.

    Any new cases that arise should then force that suburb, city, region back into lockdown with 14 day quarantines at its border.

    The same for the international borders – they should fully reopen but with full 14 day quarantines required.

    Domestic flights into quarantined cities would be banned.

    The defence force, police and MOH need to be mobilised to set up the mobile quarantine borders.

    This has to keep going until there is a vaccine.

    There is simply no point otherwise to the current lockdown.


    • just recall that the death rates are case fatality rates, not population fatality rates, and you get herd immunity well before 100% of the population is affected. Views seem to differ widely on true CFRs. Personally I tend to use 1% for most purposes, but that is simply from reading around. 25000 is a 1% CFR if 50% are eventually infected.

      Can’t see any chance of the border opening a month from now, except perhaps to let people leave (and hardly any other country would take people at present, or flights exist to fly them).


      • There appears to be no discussion by the Government about what happens in 4 weeks. It is quite clear the number of infections is increasing, the 14 days is an approximation, there are infected people with no symptoms and we potentially have some in NZ. In three weeks time we will know whether the rate of infection is slowing, but as noted above we will still not be able to go back to domestic normality.

        We have a small window until the normal winter flu kicks in and the health system comes under normal stress. My employer has had to cancel our normal flu jabs as the Government has taken all of them for front line staff (don’t start me on the fact they don’t require hospital staff normally be jabbed!).

        So in 4 weeks we may know how many more months this will last, if we are lucky.


  4. Panic and pray seems to be the plan as implemented whether intended or not. Elimination is futile so long as border control, detection, treatment and immunity are all ineffective. So lockdown will continue till at least one of these is solved for us since there is no indication any will be solved by us. How is any affected business expected to plan for or survive that?


  5. Found on Interest co nz

    “”In addition to isolating people, the Israeli government has made a priority of identifying virus carriers. In the most controversial development, the domestic security agency the Shin Bet, using hitherto secret anti-terrorist cybertechnology, is collecting location data from the mobile phones of virus carriers and sharing it with the health ministry. Officials use this data not only to track whether quarantine is being obeyed but also to match it with the mobile data of everyone with whom the sufferer has come into contact. The result is that people suddenly get a message pinging to their mobiles to say they have been exposed to a virus carrier and must immediately self-isolate for 14 days.
    Now an app has even been developed in Israel to warn people whenever they have been exposed to someone who’s got the virus.””


  6. Hello,
    I agree with your correspondent that negative interest rates (OCR) would be destabilising.but would go further and suggest that this destabilising could be dangerous.
    The value of the NZD since floating has largely been based on yield in the past as mentioned in my last comment to you.
    NZ’s appalling economic conditions of 2020 — Covid 19, droughts ,restrictive loose fiscal policies and particularly the appalling productivity that you have mentioned in previous posts. Add all this to quantitative easing Removing yield could most likely tip the dollar out of bed.
    The question then would be where would it stop?
    Further the suspicion is that other countries wanting capital will be happy to pay for it with positive interest rates.


    • The value of the NZD is determined by what our trading partners are prepared to pay for our NZD denominated goods and services. We have lost a key product that provides fundamental support for the NZD ie tourists buying up $10 billion NZD to spend in NZ.

      If we lift the Foreign Buyers ban on NZ property, we will add a trillion dollar NZD denominated asset as fundamental support to the NZD. Buying a NZ property can help maintain support for the NZD.


  7. i think the negative interest rate is a diversion, with several prpblems and does nothing that can not be done more effectively in most cases by direct interventions in our wartime economy.

    Thinking about the flow through to interest rates people are paying – banks have reduced the floating rate to 4.5 percent – a huge margin.still. It appears that the fixed rates where the business gets done havent moved much at all.

    My off the top of the head suggestion is to pretend that time doesnt exist for one two or three months. Time bound contractual -rents interest wouldnt exist for that period. lots of fishhooks and inequities of course. and it would put the banks under pressure. If that got roo much then the OBR could be activated for the entire banking system and owners interest effectively confiscated. h


  8. On the topic of modeling costs and risks; what was the equation that showed it was better to quarantine the entire population instead of a few thousand possibly infected overseas arrivals.
    We are going to pay a very heavy price for our laughable attempts (probably the wrong choice of word as it implies some sort of actual effort) to reduce contagion from entering in the first place and containing it when it does.
    I’m re-posting this for those that missed out. Almost unbelievable complacency!


    • Genius. You are right.

      Hopium is a powerful potion. 4 weeks ago our commissars were hoping it would all blow over. A worst case scenario was not contemplated.

      There are still 80,000 kiwi holiday-makers currently travelling overseas all scrambling to come home. Sherrifs Deputy Winston Peters is jaw-boning them to stay where they are


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