Coronavirus economics and policy: April Fools’ edition

Sadly, of course, we don’t wake up this April Fools’ morning and learn that the last quarter has simply been a huge and dreadful illusion.  We really are in the midst of a pandemic.

Unfortunately, we also wake up and realise afresh just how irresponsible some of the economic policy choices the New Zealand government has made in recent weeks have been, as they lagged badly behind in recognising the severity of what was breaking over us.   The government’s key economic figures, the Minister of Finance, the Secretary to the Treasury….oh, and Phil Twyford….are apparently fronting up to the Epidemic Select Committee this morning.  I hope ministers are grilled on these points.

First, we had the decision to push ahead with a further large increase in the minimum wage (from today), in a country where the ratio of minimum wages to median wages is already among the highest in the OECD, at a time when unemployment is rocketing upwards and the earnings capacity of the country has plummeted (partly, most recently, as a result of government choices, but realistically mostly because of stuff simply outside New Zealand’s control).   Perhaps one might have been able to defend such a decision six weeks ago when it might have seemed to wishful ministers not taking the threat seriously –  as indeed the Ministry of Health evidently was not – that it was just a China thing and any adverse economic effects would be small, concentrated, and shortlived.  It makes no sense whatever today.  It is a pure act of ideological self-assertion –  from a government that at the same time runs relentless propaganda urging us all to “unite”.

Things are so bad right now that perhaps the higher minimum wage won’t lead to many additional job losses right now: if your revenue has fallen 90 or 100 per cent, a higher wage rate for staff you can’t afford anyway is more or less irrelevant.   But it is an additional cost on employers at a time when for most firms profit is non-existent, at a time (as it happens) when it is very difficult to spend much money at all anyway on anything other than food and rent.

But where the increase will start to matter a great deal more is in the months and years to come.  Again, if the government once assumed the unemployment rate would barely rise, they’ve known for weeks now that any such view was simply deeply deeply wrong.  We’ll be trying to get people back into work, starting from a peak unemployment rate that may soon surpass even the Great Depression peaks, and as I noted yesterday it is ludicrous to suppose that getting back to full employment is going to be easy or quick.  The minimum wage decision makes it that much harder, and the burden will fall most heavily on the people least equipped to do well in the labour market, whom employers just won’t need to, and typically won’t be willing to, take a punt on.  Oh, and realistically the whole economy is going to be on a lower path of income per head or labour productivity (earnings capacity) than any ministers envisaged when they first rashly promised these successive increases.

If anything, we want to get price signals positioned in a way that is most supportive of as fast a return to full employment.  There are macro policy aspects to that –  eg interest and exchange rate – but minimum wage rules are also part of the mix.  On current policy settings, the government seems determined to hamstring the private sector led rebound.

And then there were those permanent worsenings in the fiscal position implemented as part of the economic package a bare two weeks ago.   In the face of what was very obviously coming, both the bulk of the business tax changes and the permanent increases in welfare benefit rates were almost reprehensibly irresponsible.  Here is what I said at the time

But the increase in welfare benefits now is much more pernicious than that.  Life on a benefit isn’t easy (and before anyone scoffs about what do I know, that isn’t just rhetoric: I have a close family member living on a long term benefit).   But what beneficiaries at least had going for them this year was certainty of income: the government was not going to default or closedown, unlike many private sector employers (with the best will in the world on their part).  They and public servants were safe.  And yet the government chooses to lock-in a permanent boost to its spending commitments (a) to those with the least degree of income uncertainty now, and (b) when the country is in the process of becoming a lot poorer and scarce resources need to be used wisely.   Raising benefits might or might not have been a reasonable luxury in settled times.  It is simply irresponsible and evidence of fundamental unseriousness to do so now.  (And before anyone tells me about the high marginal propensity to consume that beneficiaries have, let me remind you that now is not the time for stimulus or encouraging people to spend more: instead we are entering a phase of deliberately choosing to shrink the economy to give us the best hope of fighting of the effects of the virus).  Oh, and the unemployment rate is going to rise a lot, and one of the big challenges after this is all over is going to be reconnecting people with the labour market, at a time when wage inflation will have been depressed anyway.  In that context, higher benefit replacement rates (relative to wages) is really the last thing that makes sense in getting the economy back on track.

We are poorer as a nation –  very considerably poorer so for the time being –  and yet the government splashes permanent increases on one of the only groups in the country whose real incomes this year are actually secure.

But it isn’t some April Fools’ joke, it is fiscal and economic policy as delivered to us by the Labour/NZ First (and Greens) government.

I could go on, reprising themes from recent posts.   In many ways Grant Robertson has always just been Mr Conventionality when it comes to economic policy –  happy to go along with whatever establishment thinking is for the moment.    That was true pre-crisis –  whether, for example, you liked the Budget Responsibility Rules or not, the conventional wisdom did; whether you thought something really needed to be done about our utterly dreadful productivity growth record, the conventional wisdom was content to tinker (and The Treasury was worse, content to play with its Living Standards Framework distractive toys).

But exactly the same Mr Conventionality is one display now.  He is content to sit by, not even saying a word let alone using his statutory powers, about his Monetary Policy Committee simply refusing to cut interest rates in face of the biggest slump in modern history –  because establishment thinking tells him there is nothing there, the same sort of establishment figures so wedded to the Gold Standard pegs in the early days of the Great Depression.    Sure, fiscal policy today looks very different than it did even a month ago, but not in any surprising, bold or innovative ways.  The wage subsidy scheme doesn’t run for long, is now quite ungenerous by international standards, and there is no sign at all that the Minister has grappled at all with the nature of the extreme uncertainty that all businesses are facing.   And perhaps as bad, the government seems much more interested in bail-outs for big and prominent companies than it does in something systematic and economywide.   But it is those big companies who will have the ear of ministers and senior officials, who will get the media coverage.    Small firms typically don’t (in the same way grieving families barred from any sort of funeral, no matter how small or distanced, outdoors, don’t command the attention of this government).  That big company focus –  case by case consideration of individual big firms, presumably with little transparency and no accountability –  is reflected in stories online this morning (sorry, can’t immediate re-find the link).

And if there is a strategy it appears to be infrastructure, infrastructure, infrastructure…..without much regard for the twin facts that (a) whatever infrastructure projects might have passed decent cost-benefit tests six months ago now (a subset of those actually approved), fewer will today, and (b) relatedly, whatever we thought we needed six months ago, we will need less in the next few years.   I’m not opposed to sound infrastructure projects getting accelerated go-ahead, in principle, but if the government believes high-speed rail from Auckland to Tauranga or Hamilton, or lots more Island Bay cycleways, are the answers, they will simply be on the path to making us poorer.

There has been much comment from Labour ministers evoking Michael Joseph Savage in recent weeks. I know he is some sort of Labour icon –  I’m always surprised that some friends of ours still have his photo on their wall – and no doubt there were a handful of good things done on his watch. But, as a reminder, the Savage government had almost nothing to do with New Zealand recovering from the Great Depression – it was almost wholly over in New Zealand by December 1935 –  and its reckless macroeconomic policies ran New Zealand into such a serious financial crisis in late 1938 that we ended with tight exchange controls –  government permission for your overseas magazine subscription or your holiday or your retirement investment portfolio –  for the next 45 year, and only narrowly averted a much more serious default on the government’s debt that anything that actually occurred during the Great Depression itself (and we weren’t spared that by decent New Zealand management, but by the grace and favour of the UK government, concerned not to severely dislocate New Zealand when the war was likely to be only months away).   Labour might have a sentimental attachment to the man –  who seems mostly to have been a decent sort as an individual –  but it is distinctly unnerving when one reads senior government figures, including Grant Robertson, evoking those times and policies as an example for now.  Did I mention that part of what that government kicked off was the retreat from the world –  going into the 1930s we had probably the highest per capita exports of any country.  This time we start already having the lowest share of GDP accounted for by exports of any modestly-sized advanced country.   We need an outward focus, as much as possible, to whatever extent is reasonably possible, not a guiding philosophy that thinks we can get rich mostly, as a very small country, simply by taking in each others’ washing.

The government has done very poorly so far on the economic response to the crisis.   That needs to change urgently.  It isn’t promising when media report, as the Herald did this morning that the focus is still on a Budget six weeks away.

They have also been extraordinarily non-transparent.  One might think that the best way to build and retain trust, and develop confidence in your strategy, would be to pro-actively all the advice and memos the government has received in formulating policy –  it would also be less labour intensive than responding to the avalanche of OIA requests that is becoming increasingly inevitable.   But, as far as I can see, we’ve seen nothing at all of The Treasury’s analysis and advice on the economic implications and options.