That is the title of a paper issued on Thursday by the New Zealand Initiative think-tank (mainly written by their chief economist Eric Crampton).  The subtitle is “Public policy prescription for a pandemic” and they range pretty broadly (although not really on public health itself) in the suggestions they offer and issues they raise.  It is well worth a read for anyone seriously interested in thinking about what policy responses the current situation demands, as well as the sorts of issues that will need to be faced when, some considerable way down the track most likely, we are in a position to think seriously about a recovery.

(By contrast, if it is political spin you want re the eventual recovery, you could try the front page of this morning’s Dominion-Post reporting and channelling comments from the Minister of Finance suggesting some sort of Bill Sutch-like pulling back from the world longer-term, insulationism, and massive public works projects.  The election campaign is clearly getting underway, and the PM and Minister of Finance have claimed to be inspired by Michael Joseph Savage, and whatever good things his government did it led us into the rocks of financial crisis and an insulationism that took decades to undo.)

There is a lot of material in the NZI paper and I don’t want to write a super long post, so what I’m going to do is to take the Executive Summary section by section and offer a few comments on each, and then pick up a few of the interesting or puzzling other ideas that didn’t quite make it up to the front of the document.

Unless effective treatment for the novel coronavirus Covid-19 emerges quickly, the world faces not only misery but economic depression. New Zealand will be immune to neither. The normal economic uncertainties of a downturn will be compounded by the uncertainties of a pandemic.

Perhaps a matter of terminology here –  and I know the first draft of the document was written a while ago – but what we already have is much more than a “downturn”.  More like a “dramatic slump”, partly a result of New Zealand government choices re the virus, but much just unavoidable whatever our government had chosen to do.  The scale of the actual quarterly fall in GDP in the June quarter is likely to be utterly unprecedented –  even if by some miracle the current partial lockdown ends 3.5 weeks from now.

The New Zealand Government’s policy needs to directly boost capabilities in the health sector while providing the kind of appropriate economic support necessary when we’re all taking a lengthy staycation and some industries are put on ice.

Uncertainty about the duration of this crisis makes deciding on the most suitable policy difficult.

Certainly agree about the uncertainty, but in a way the uncertainty is even greater, and much more constraining, for the typical business (and many households).  And that facts does point in some policy directions rather than others, given that the Crown is better placed to bear much of that risk that individual private sector operators (firms or households).

(Incidentally, I’m guessing that the huge number of people losing their jobs altogether each day aren’t thinking of this as a “staycation” but as an utterly disorienting disaster (even if, as for most of us, we know no one with the virus itself yet).

What they say on health itself seems sensible to me

The first priority must be with health.

Increasing the capacity of the health sector to deal with peaks in numbers of Covid cases is important to reduce mortality and morbidity rates. But nobody quite seems to know just where the binding constraints in the health sector are. While credible newspaper articles warn about substantial shortages in equipment and incredible pressure on staff, official statements have been far more sanguine.

If there really will be shortages of critical equipment in four to six weeks, potential suppliers should know that today. Quietly shoulder-tapping likely suppliers may partially solve the problem but won’t provide the necessary scale of response. Suppliers can come from unlikely places. For instance, Italian hospitals are reportedly trialling ventilators reconfigured from scuba diving equipment. Simply announcing a willingness to purchase equipment – and the prices the Government is willing to pay – would allow potential suppliers to identify themselves. Serious companies aren’t likely to re-tool without the certainty of a contract. But they do need to know the demand exists and that they can get essential service status to do the job.

Rapid identification of equipment and skills necessary to boost capability in the medical system, combined with a wide call for assistance, would enable people and businesses to find ways to help. If the health system is not already doing so, it should be offloading less-significant tasks to helpers with limited training, to ease the burden on key medical staff. For instance, thousands of air cabin crew have been trained in first aid and will have plenty of time on their hands. With some rapid training, they may be able to ease some of the burden.

Additionally, the Government has asked retired health workers and health workers furloughed by the current lockdown to assist in Covid-response. It should also consider those foreign-trained medical professionals already in the country who have not yet been able to secure New Zealand medical registration.

To which one could add that a commitment to utter honesty and transparency about what the government does and doesn’t know, has and hasn’t etc would help build stronger confidence.

Part of the cure for a pandemic is a sharp reduction in economic activities in areas not related either to pandemic response or critical areas like food supply. That’s why support for workers and firms is important. But the Government’s chosen wage subsidy scheme is not working well. Even if it can be extended to larger employers, it provides too little support to keep companies from laying off staff en masse.

The Initiative urges the Government to consider a version of Germany’s Short-Time Work support policy. That scheme allows firms to shift workers to a fraction of their normal hours along with an income top-up from the Government. That way, instead of laying off 80% of staff, a company could keep staff on 20% of their normal hours with little reduction in worker earnings.

This kind of scheme is better than either relying on benefits or starting up the sometimes-promoted universal basic income (UBI). A speedy reboot of the economy when this is over matters. That is much harder to do when companies must rebuild hard-earned experience and skills from scratch. The Short-Time Work support policy maintains both workers’ incomes and their links to employers. It targets support to those workers whose hours are cut, rather than spreading support broadly to those far less affected. Simply put, it works better.

I’m increasingly attracted to the Short-Time Work option.  In Germany, for example, in the last recession real GDP fell by more than in New Zealand, and yet the rise in the unemployment rate was much less in Germany than in New Zealand.  Whether or not it makes sense for a country like New Zealand in the longer-term is an open question –  I’m not yet persuaded – but….had it been in place a month ago here it would have looked quite well-suited, albeit perhaps too generous, for the situation we now face.  My unease with as proposed in the NZI paper, and given the time that has already passed, is that if we tried to adopt it as the main initiative now, it might still not do much to keep firms intact –  so severe are the losses of revenue and the extreme uncertainty about whether and when that revenue might again pick- up markedly.   And I entirely agree with the NZI that a UBI is simply not fit for purpose at present –  it does nothing to sustain firms and labour market attachments, and it provides bonus income to the large chunk of the workforce (especially in the public and agricultural sectors) that aren’t likely to be very adversely affected anyway.

Some tax provisions can also be eased. Individuals and firms should be allowed to combine the 2020/21 tax years and temporarily suspend their PAYE collection and Kiwisaver contributions. This would immediately provide more cash in hand everyone. Companies staring down provisional tax assessments based on last year’s earnings could instead defer everything to next year.

This one puzzles me a bit.  It is hard to see that it would do much harm, but it isn’t clear what good it does either.  For those still in a job, they don’t have need of huge amounts of cash right now (what is there to spend it on?). For those out of a job, they aren’t paying PAYE and Kiwisaver anyway. I guess the focus is people on reduced hours, and I don’t have much sense of how large a proportion of the labour force they might be.

Simultaneously, the Government could help reduce business’ fixed costs that otherwise might have compelled them to shut down. It could also cover Council rates bills for firms in financial distress, averting a major hit to the local government purse as well. And access to credit can be improved, especially over the longer term as wage support to employers may need to ease.

I’m a bit puzzled about the rates focus.  I don’t have the figures at my fingertips, but I would assume the business fixed costs that were typically much more substantial were rent, lease costs, and other finance costs (ie interest) –  business interest rates having hardly fallen at all.   There has been some discussion in Australia of the possibility of the government taking over not just wage liabilities but rent.   It is radical, but not out of line with the spirit of my own scheme, guaranteeeing for a year all firms and households 80 per cent of the most recent year’s taxable income.

Finally, a modified version of the New Zealand Student Loan programme should be made available to non-students to help bridge any remaining income gaps. It has the advantage of having already set provisions for income-contingent repayment when the crisis passes.

This is an idea I really quite like.  I asked Eric the other day why they weren’t including here an option to withdraw Kiwisaver funds – again done in Australia –  and he suggested that this borrowing scheme might be preferable, and avoid the risk of encouraging people to cash out of Kiwisaver at the bottom of a share price slump.   Personally, I think people should make their own judgements about that –  US share prices don’t look very low to me – but the secure access to credit (amounts capped at a moderate level) seems quite a good idea.

But financial support is not the only way the Government can and should help.

Regulations that were no real barrier to getting things done in normal times can be insurmountable in a pandemic. For example, some airline pilots require time in simulators to maintain certification, but the necessary simulators are in Australia. In normal times, this just doesn’t much matter – pilots can roster onto an Australia route when and as necessary. This doesn’t work now. But the Government can’t be expected to identify every barrier proactively. It needs to rely on business to highlight the obstacles as they come up using lines of rapid communication with regulators who can suspend or modify them during this crisis.

Sounds sensible to me.

And this is no time for policy or regulatory changes which are not related to the pandemic. The Reserve Bank and Commerce Commission have already postponed theirs. But Parliament’s Select Committees are still asking for submissions on non-urgent legislation. Doesn’t the Health Select Committee have better things to do than consider the regulatory framework for vaping? Some legislation may be urgent enough to require submissions during the Level 4 alert, but everything else should be quarantined.

Totally agree (and I could not quite believe on Thursday when someone asked me for some input on an aspect of a submission on a not-very-important-at-all bill that had submissions closing that afternoon).

Obviously, the Government should borrow the funds it needs to do all this. But this will require maintaining a disciplined approach to any spending lines unrelated to the pandemic. Entrenching new ongoing commitments would complicate a return to prudent debt levels after the crisis and make it harder to borrow the funds necessary for responding to the pandemic.

Hopefully the four weeks of Level 4 lockdown gives the Government enough time both to knock back the pandemic and adjust policy to help us through the coming economic turmoil. We need to adopt more effective treatment.

It is likely to be easy enough to borrow whatever it takes through the crisis.  Not only is the balance sheet strong, but we have a central bank, able to effectively lend into a shock that is, for the time being, powerfully deflationary.  Whatever monetary policy can do, directly or indirectly, the better.

What else struck me in the rest of the document.  Simply in the order the paper comes:

If a treatment does not emerge quickly, economic turmoil could easily last well over a year and the 2008 recession could look mild by comparison.

At this point, this is rivalling the Prime Minister for understatement. For New Zealand, what we see now is already far worse than the 2008/09 recession.

Firms that were viable during normal times and would be viable again after the crisis may nevertheless have substantial difficulty in securing credit to see them through.

The government’s small and medium business loan guarantee scheme –  details yet unknown – may well tackle this particular issue. But it is unlikely to be the main issue.  A far bigger issue is that many firms’ owners will not be willing to borrow, faced with the huge revenue loss and huge uncertainty.  If time could simply be stopped as at the end of February and resumed again 12-18 months hence, it might be one thing.  But there are real and often big costs for many firms, even if the government were to cover many of the wage costs –  and recall that at present even the government wage subsidy is only on offer for a few months, and there is no possibility of many of the adversely affected industries coming back strongly in that time.  We know that.  More importantly, owners in those sectors either know it already or will be realising it very fast.  My one year income guarantee is aimed to buy time before firms simply decide to exit.  But more will simply be exiting with each week that passes, without government action.

(Incidentally, I was a bit surprised not to see any caution in the NZI paper on one rule for the big and well-connected firms and another for the mass of companies.  Sadly, that is the way the government seems to be talking at present, and Air New Zealand already sets something of a precedent.   Quite possibly, policy will not be generous enough anyway, but it would hardly command ongoing public support if just the big-end of town is able to collect from the government.)

A post-crisis recovery period might include longer school and university hours to allow students to catch up on missed work and the temporary extension of working hours for the employed.

Quite what is going to happen, especially around school, if the situation drags on for long is hard to tell.  The current on-line model might work fine for well-motivated senior students, but I’m sceptical it can work for long.  I was a bit more troubled by the final better of the sentence: people may well want to work longer hours, and should be free to do so, but there is a tone to that sentence that almost suggests the state might direct longer hours.  And I’d be distinctly uneasy about anything of the sort.   In thinking about coming through the other side of this, it is wise to keep the overall economic losses in context.  Suppose GDP fell by 50 per cent for a year: that total loss is equivalent to 1 per cent of the total income the country and its people will generate in the next fifty years.  Even if we end this with government debt at 70 or 80 per cent of GDP – which need not happen with sensible balanced, but generous policies, in a growing economy with a balanced budget debt ratios drop away steadily without undue longer-term dislocation (as a historical reminder, the highest level of government debt on record in New Zealand was about 230 per cent of GDP).

Reckless trading provisions of the Companies Act makes directors liable for taking on more credit while insolvent. Policy may require making credit available to companies made insolvent by the crisis.
Banks may be unable to lend as needed during the current crisis if hampered by responsible lending criteria requiring assessment of future income. Relaxing these criteria will help.
Record-keeping and witnessing requirements of AML/CFT regulations currently require face-to-face processes; this may be impossible during lockdowns. Alternative compliance arrangements must be implemented.

I wasn’t quite sure of how much there was to the second point –  although would welcome any comments to elaborate-  but generally the issues raised seem sensible.

Encouraging more people to work from home may require helping individuals and firms with any unexpected costs. The Government’s decision to allow full depreciation of minor business investment will help. It may wish to go further in supporting firms providing employees with the necessary equipment if people are working from home over longer periods. Office-based workers, in the short term, can make do with a laptop but may eventually require monitors, printers and other similar equipment at home. Small condition-free grants to small business calculated by employee headcount

This one seemed like a level of specific support too far, and again would be better dealt with through my overarching income guarantee approach, which enables firms and individuals to make their own choices.

As I say, there is a lot in the paper worth thinking about and debating.  From my perspective it is mostly rather micro-focused, but in that sense much of what is good about the paper meshes quite nicely with my programme for macroeconomic stabilisation, which might usefully be read together with the NZI piece.   The proposed one-year income guarantee –  ACC for the national income, the payout of an (implicit) national pandemic insurance policy –  is at the centrepiece of that, but so too is further really major cuts in retail interest rates.  It is truly remarkable that the government can shred civil liberties, scrap Parliament in the midst of a grave crisis, close down much of the economy and almost all of society, ban funerals and so on….and yet the government, while essentially unfettered power at present, for good and ill, will do nothing to insist on such a basic aspect of responding to any large scale economic slump: much lower interest rates, and servicing costs, in a period when time simply justifies no return.

More on that issue on Monday.