No one quite knows – and may never do so – quite how bad the slump in GDP is during the current four-week partial lockdown. We don’t have a monthly GDP series (unlike Canada and the UK), our quarterly series comes out with a very long lag (June quarter data should be around in late September) and we can expect greater than usual revisions to that data in the years to come, and (so far at least) there is no sign of Statistics New Zealand doing the sort of flash estimate the French statistical agency published a few weeks ago. One thing to remember is that to whatever extent consumption is holding up, there is almost certainly large-scale destocking going on.
But whatever the scale of the slump in value-added (GDP) where would it take us back to, in real per capita terms? Using the Conference Board database (which goes back to 1950) here is GDP per capita for each year as a percentage of last year’s.
If GDP for the current month were 64 per cent less than last year’s, we’d be back to real per capita GDP levels in 1950. 60 per cent takes one back to 1957, and a 50 per cent fall to 1970.
If, perchance, you are an optimist, a 40 per cent fall takes us back to 1984 and a 30 per cent fall to 1997 levels.
Now, of course, there are important differences. First, the fall in GDP during the partial lockdown is for four weeks only, not a full year. But second, plenty of people (think public servants, farmers etc) aren’t losing any income at all – even if, as in the case of many public servants value-added is likely to be down – while others are facing catastrophic losses. By contrast, in 1950, 1957, and 1970, there was pretty much full employment in New Zealand. The third important difference is, of course, the scope for a rebound – the underlying technologies and knowledge that made our society relatively prosperous haven’t suddenly disappeared.
Time and fragmentary data will eventually tell, but I struggle to see how the economy right now can be running at more than 50 per cent of normal. There are baseline things that haven’t changed: the imputed rent on owner-occupied housing is the starkest example, but you could think of Police, supermarkets (and their suppliers), farmers, the main news media outlets, and so on. Others probably aren’t very adversely affected: banks as an example (in terms of GDP contribution), and some online services. But even in the public sector, there will be plenty of areas where real value-added will have dried up – not much activity for immigration or biosecurity staff at airports, hospitals are much emptier than usual and so on. Getting paid isn’t the same as producing: in many cases, the real value-added just won’t be there, just income transfers from employers (including government ones) to employees.
Of course, whatever the extent of the loss of output/value-added at present, perhaps that loss will be shortlived and we will soon emerge to some slightly less-restricted scenario. There was one optimistic columnist last week looking forward to a scenario in which New Zealand had, in effect, “eliminated” the virus and so life could, in time, return to “normal” behind our ocean moat: this was described as an “idyllic scenario”. In overall economic terms it would be anything but. Recall the statistic I heard quoted by a government minister at the Epidemic Committee a week or two back: just over 9 per cent of New Zealand jobs stem from overseas tourism. So there is a tenth of the workforce added to the unemployment numbers, alone enough to still leave us with the highest unemployment rate we’ve had since before World War Two. And if the virus continues to rage in the rest of the world, even if only lurking in some places, the fear and uncertainty will remain very real. Business and consumer confidence will remain extremely low. Willingness to commit to long-term contracts will be at a very low-ebb, so private investment (20 per cent of GDP) will be very low. And banks, quite rationally, will be very cautious indeed, watching out for the adverse selection problem – people keen to borrow in such a climate will, in many cases, not be those banks would sensibly wish to lend to.
Now, sure, there is some scope for substitution. But for those (many) accustomed to sunny winter holidays, Ohope or Whangamata in the July holidays just isn’t going to be a serious substitute. And there are going to be compounding supply chain problems – not just for local producers, but for local consumers, as not only foreign production of many items is disrupted, but air and sea freight services, and local distribution, just don’t work as they once did. Even if people are keen to spend – and many won’t be – their options are likely to be fewer, even behind the moat.
Of course, direct government demand for goods and services (as distinct from just income transfers) may boost economic activity to some extent. But (a) realistically, it will take some considerable time for even ambitious schemes to hit the ground in meaningful ways, and (b) as the scale of the gaping fiscal deficits begins to hit home, people (firms and households) are likely to begin adjusting their behaviour, at least to some extent, to allow for the near-inevitable fiscal austerity (higher taxes, cut to some other spending) to come.
At this point, specific numbers are really not much more than a marker of broad orders of magnitude, but even if that Hooton “idyllic scenario” were to be in place by, say, the start of the third quarter, I struggle to see how real GDP is not still perhaps 15 per cent (range perhaps 10-20 per cent) lower than otherwise for the second half of the year. That would still be by far the deepest recession we’d had since before World War Two. (And simply on the revenue losses alone – automatic stabilisers to be sure, but it could take some years to fully recover – that could add 6-7 percentage points to the fiscal deficit as a share of GDP.)
Finally, I wanted to draw attention to a piece published on Thursday by Bryce Wilkinson of the New Zealand Initiative, under the heading “Quantifying the wellbeing costs of COVID-19”. I haven’t seen any media coverage of it, which is a shame. It is a nicely framed and phrased note. This is from the summary.
In deciding whether to extend the current lockdown, the government must balance the likely benefits of reduced sickness and deaths against the cost of lost national income and jobs. To do so systematically requires an analytical framework that organises the available information.
A preliminary model illustrating how this can be done was published in 2017 by five of New Zealand’s leading epidemiologists and colleagues. This research note does not critique that model. Instead, it uses it to quantify the possible costs of morbidity and mortality due to Covid-19 as a starting point for further analysis and debate.
(Among the co-authors are the newly- prominent Otago academics Michael Baker and Nick Wilson.)
(And before anyone gets upset at the idea of economists wanting to “sacrifice the old”, I hope Bryce won’t mind me pointing out that since his PhD was awarded in 1976, and he got his first degree in 1968, I’m pretty sure he must be over 70 himself now.)
What is the nature of the exercise?
The five New Zealand authors developed the model using parameters drawn from the experience of the 1918 flu epidemic. Some have since made a major contribution to the papers addressing the Covid-19 crisis published by the Ministry of Health in the last fortnight.
Unfortunately, an updated version of the 2017 model does not appear to have been published. Nor do the recently released papers appear to express the potential morbidity and mortality implications of Covid-19 in terms comparable to costs.
This research note takes the 2017 spreadsheet model as given and modifies it only to measure the morbidity and mortality rates indicated for Covid-19 in the papers.
Bryce adds the caveat
It cannot be stressed enough that these results are highly conditional. This report is a contribution to public debate, nothing more. Hopefully, the public sector is building much better models to advise ministers.
I wish I had any confidence that they were.
These are the adjustments/updates done
b) Modifying the model to Covid-19 parameters.
The first necessary adjustment replaced the age distribution of deaths for the 1918 flu epidemic with one that considers that Covid-19 disproportionately kills the elderly.
Values for the age distribution for hospitalisation and deaths were taken from Table A3-2 in a February draft paper for the Ministry of Health.8 With some interpolation, it showed those aged at least 65 years accounted for 35% of estimated 336,000 hospitalisations and 82% of deaths. In its “plan for” scenario, the number of hospitalisations was kept at 336,000 whether deaths were 33,600 or 12,600.
The next step was to align various other parameters with advice from New Zealand’s leading epidemiologists to the Ministry of Health.
Specifically, a draft paper for the Ministry of Health dated 27 February 2020 provided the following guidance about relevant parameters:9
• 65% of the population (3.23 million) stood to be infected if the virus was “substantially uncontrolled;”
• 34% of the population (1.68 million) would be symptomatic.
The total 2014 population in the 2017 model was scaled up until 65% of the 3.23 million were infected which increased the value of a lost QALY was to $52,500 (national disposable income per capita for the latest available year).
With a bottom line as follows
The adapted model indicates spending 6.1% of GDP to save 33,600 deaths, or 3.7% of GDP to save 12,600 lives, is economically justifiable. To spend more begs the question of whether more lives could be saved over time if [as illustrative examples of the sort of prioristisation that routinely goes on in public and private choices] the money went instead to make safer roads and buildings, or perhaps spent on other health services.
There are a number of caveats and uncertainties listed on page 6 of the note. The first of them is
This presumes spending 6% of GDP would achieve the hoped-for savings. It would not justify spending as much where there is only a modest chance of success.
As I said, I thought it was a nice, short, note highlighting some of the issues and choices; a way of thinking about things which should be influential with policymakers and advisers even if (with all the resources available to them) the specific estimates and assumptions Bryce uses might be usefully refined.
Of course, even if in some sense Bryce’s numbers are “right”, it isn’t entirely clear how much further ahead it leaves us, whether individually as voters/citizens or for the government supposedly making collective decisions on our behalf. As I’ve noted in various posts here it is really important to think in marginal terms – eg how many lives are likely to be saved from this particular intervention – not in the broadbrush.
Almost certainly, (New Zealand) GDP this year will be more than 6 per cent lower than otherwise. But interesting as that number is for some purposes, much of it simply isn’t a matter under the control (or heavy influence) of New Zealand governments. The world economy – yes, even China – is in a very severe slump, and there isn’t anything much we can do about that (although, hobbyhorse issue, sorting out domestic monetary policy would help a little). There is no global coordinating mechanism. Travel bookings to New Zealand were slumping well before the government closed the border and imposed quarantine requirements (and if the government re-opened the border tomorrow there still would not be much travel). Domestically, many people had made choices to, for example, avoid air travel, or avoid large events etc before any restrictions were in place. The relevant metric for New Zealand policymakers is surely the marginal economic costs of their specific interventions, relative to the marginal number of lives saved as a result only of that same set of interventions.
Recall too that Bryce’s numbers are expressed as a share of annual GDP. But suppose a series of domestic lockdowns (to a greater or lesser extent) affected economic activity for only a quarter, then even if everything else in the note was accurate, it could be worth sacrificing almost 25 per cent of one quarter’s GDP purely as a result of those lockdowns if by doing so the authorities were highly confident of saving the 33600 lives purely as a result of those lockdowns. For the economic costs, that order of magnitude might yet be in the right ballpark for the marginal impact of these lockdown measures. Whether, with a high degree of confidence, that many lives are likely to be saved purely as a result of those specific interventions isn’t something I’m going to opine on.
There aren’t many, perhaps any, clearcut answers to many of these issues (apart from anything else, no one knows the end-game), but that doesn’t make a disciplined framework for trying to help structure thinking and policy advice any less valuable. One would like to think that The Treasury, the Ministry of Health, and other key agencies are doing exactly this sort of thinking, and scrutinising and robustly debating each wave of results, and each apparent fresh set of insights on the broadly-defined costs and beneftis of each set of interventions being explored.
(And, although this is an economics-focused blog, I hope that when Cabinet is deliberating on choices in the next few weeks it isn’t just the measureable economic dimensions of the costs of interventions they focused, but also some of frankly inhuman restrictions that have been imposed to date, that treat families and civil societies as, in effect, some luxury considerations, able to be set aside at the whim of politicians.)
22 thoughts on “Some economic dimensions”
National Geographic used to have movies where the wildebeest are thronged up on one side of the river and the crocodiles below. A valiant old wildebeest would offer himself to the crocodiles. Later it was observed that they were being pushed.
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Something I wonder about at the moment is that perhaps people are being overconfident about how far the housing market may fall.
Although in the past people have chosen to ride out drops in price, it will longer be an option for people who have been made redundant and will find it difficult to get new jobs. Highly leveraged investors who lose rental income could lose all their properties from a domino effect. People will avoid buying until they are certain the market has stabilised – even “cashed up” investors looking for a bargain are likely to hold off, and banks are going to be very cautious about lending to them.
The final nail in the coffin might be the thousands of rental properties that stand empty due to the lack of tourists and overseas students and workers.
Perhaps the market may even drop to the levels analysts have called “affordable”?
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Agree. My benchmark from the v beginning of this was that real house prices fell 15% in the last recession, when (a) int rates plunged, and (b) unemployment rose only 3 percentage points. Admittedly, credit conditions were looser going into the last recession, but something like a 15-35 per cent fall this time sounds quite plausible. Sadly, the correction will probably prove to be only (multi-year) temporary. Any impetus towards freeing up the land market is likely to dissipate as we emerge into an age of bigger govt.
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In Asian Crisis of 1998 there were investors who were liquidating at any price. Combine that with the perception that the NZ$ will fall compared to the yuan or US dollar resulting from any QE which NZ has not favoured before.
I have been looking at buying into a Epsom double grammar zone apartment to get my daughter into the EGGS school zone. I thought there would some deals from desperate sellers. Unfortunately, prices are holding up very well. I think prices on average have risen rather than fallen which is rather surprising. A check on all other locations to see if neighbouring properties are available next to my existing properties also turned up nothing for sale that looks like a fall in prices even in Mt Eden, Otahuhu, Glen Eden, Mt Roskill, Lynfield or Huntly where I have existing investment property.
In Asian Crisis of 1998 there were investors who were liquidating at any price. Combine that with the perception that the NZ$ will fall compared to the yuan or US dollar resulting from any QE which NZ has not favoured before.
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Desperate selling was only limited to Asian held property that were affected, mainly suburbs like Howick, Flatbush, Pakuranga that had risen massively off the back of the return of Hong Kong to the Chinese, that took a major hit with desperate Asian sellers that needed to prop their ailing investments in Asia.
And, although this is an economics-focused blog, I hope that when Cabinet is deliberating on choices in the next few weeks it isn’t just the measureable economic dimensions of the costs of interventions they focused, but also some of frankly inhuman restrictions that have been imposed to date, that treat families and civil societies as, in effect, some luxury considerations, able to be set aside at the whim of politicians.
I agree with your comments above. It is too easy to have segments of society bare the cost of government decisions taken unilaterally without consulting. This happens routinely, the most visible is on our roads where closures and restrictions are applied as of some sort of right using the motorists time as if it was worth zero.
Getting off the ranch, what are your thoughts on the Reserve Bank modestly printing money so the plumber, painter and candle stick maker can continue to pay their bills and get the economy working until we get into production to make real money.
Even if the RB runs it, it would be at the mercy of the politicians that gave you the world’s most unaffordable housing. I wouldn’t trust them to make the unpopular decisions that might be needed to stave off hyperinflation.
Getting off the ranch, what are your thoughts on the Reserve Bank modestly printing money
Hopefully, this will not happen. I had the misfortune of living in the country where this happened. The results were total destruction of the economy and widespread poverty for almost whole population for almost two decades.
I don’t have any particular problem with their bond-buying operation – “printing money” to all intents and purposes- altho it would have been much less necessary had they been willing to cut the OCR further. I’m not worried about inflation risks at present (this is a seriously deflationary shock, and they need to be leaning against that) altho they will need to be monitored carefully as things stabilise and the economy returns to some sort of normal over the next few years. Bear in mind that many people worried about inflation risks when other countries did these asset purchase programmes in the wake of the 2008/09 crisis, but in fact the big challenge for central banks for much of the last decade was keeping inflation up enough to hit their respective targets.
[Stop covid or save the economy? We can do both
It’s the type of inertia that clearly frustrates Romer. He calls the $2 trillion legislation passed by Congress “palliative care” for the economy. If you took $100 billion and put it into testing, he says, we would “be far better off.”]
The only successful way out of lockdown for NZ (if we dont make it to elimination) is that NZ either buys massive numbers of test kits (preferably the quick 5 min antibody blood) if available, or find some way to ramp up production of them ourselves.
Of course we should be doing it ourselves. It would need the right expertise in science, technology and maths. Which happens to be the STEM expertise Massey University is planning close it down.
I assume that the paper referred to by is (Boyd, Baker et al. 2017), a revised version of which was published in 2018 (Boyd, Mansoor et al. 2018). The model used in these papers is based on the 1918-19 influenza pandemic.
It is unfortunate that Bryce did not critique the model. I believe that there is much in the model that demands to be questioned, pretty well all the epidemiological and economic assumptions on which it is based.
The model, updated with Covid-19 data, particularly from China and Italy, is the source of the “if nothing is done” predictions of New Zealand deaths at 33,600 (high rate) and 12,600 (low rate) which have been used to justify the draconian measures adopted by the government.
What if they are way out? We will never know, because there is no control, so the outcome, whatever it is will be taken as affirmation of the policy. “Think how many would have died if we hadn’t done as we did.”
And way out they in my opinion are. Worldwide under-reporting of mild cases has led to under-erestimation of reproductive rate (the R0) and over-estimation of case fatility rate. Not onlythat, but extrapolation from crowded Northern cities, where doses of virus will have been much higher, vitmin D status much poorer (just to state two obvious factors) to empty, sunny, New Zealand, is questionable.
I would leave it to those better qualified to comment on the economic assumptions, but I feel sure they are as, or more, seriously flawed.
The citations of the papers are:
Boyd, M., M. G. Baker, O. D. Mansoor, G. Kvizhinadze and N. Wilson (2017). “Protecting an island nation from extreme pandemic threats: Proof-of-concept around border closure as an intervention.” PloS one 12(6): e0178732-e0178732.
Boyd, M., O. D. Mansoor, M. G. Baker and N. Wilson (2018). “Economic evaluation of border closure for a generic severe pandemic threat using New Zealand Treasury methods.” Australian and New Zealand journal of public health 42(5): 444-446.
We don’t know what was, either, the infection fatality rate or the case fatality rate for the 1918 influenza epidemics. Estimates vary so widely that any models construed on the basis of that event are of very limited validity. While we don’t know the infection fatality rate for the current epidemics, we have some idea of the case fatality rate. It is however of a quite limited value due to the lack of standardized classification of fatalities, i.e. the exact cause of death can only be established by an autopsy, otherwise we can’t know whether the virus was the causative or contributory factor. Looking at NZ it would appear that in all fatalities there’re other factors present (age and underlying diseases) and Coronavirus wasn’t necessarily the principal cause although, undoubtedly, it contributed to each fatality. The hospitalization rate for Covid-19 patients in NZ is also, so far, very low. So, the question arises…what is the REAL severity of this particular disease, dramatic media headlines notwithstanding?
“One would like to think that The Treasury, the Ministry of Health, and other key agencies are doing exactly this sort of thinking, and scrutinising and robustly debating each wave of results”
Michael, for those of us who’ve never worked in the civil service and have no idea what goes on in there, is it likely these agencies are in fact running through analyses like these? Is that something they are typically doing? The prime minister doesn’t give any hint of it in her updates. But perhaps she just likes to keep the communication to the basics.
Only time (OIAs and a Royal Commission) will really tell, but I would expect to find lots of blind panic, chaos, and details-focus, with not much interest in, or capability for, the sort of thinking/analysis implied here. I suspect there will be a “can do” mentality – how to operationalise the chosen direction – which has its value, but shouldn’t be the only priority. Sadly, capability in much of the public sector , incl Tsy, has been degraded over recent decades.
Michael, – Its not as if we haven’t had time to prepare – including modelling, planning etc. Health professionals probably have best done so, but with a politically driven public service tomorrow’s problems are always an academic interest only. Today politicians probably never plan – just take action, watch the polls, take action, watch the polls, repeat….
e.g. For how we are dealing with this – I distributed this quote from 2000 to other friends recently:
Wim Van Damme and Wim Van Lerberghe: “Editorial/ Epidemics and Fear”: Tropical Medicine and International Health: volume 5 no 8 pp 511–514 August 2000.
“Decisions on interventions to control epidemics are usually motivated both by an assessment of the probability of excess morbidity and mortality and by fear. Fear causes pressure to act, but also facilitates the mobilization of resources. The resulting time pressure usually does not allow for putting the expected burden of the epidemic in perspective with other health problems. The expected additional burden is usually overestimated (worst-case scenarios carry the greatest weight).The knowledge base used for the decisions is often incomplete, and time constraints may leave it so”
and…“Epidemics are characterized by time-pressure and fear. In such circumstances it is difficult to distinguish uncertainty and risk, put probabilities of individual harm in perspective with other risks and allocate resources accordingly. Dealing with time pressure and fear – among professionals as well as the public – is an essential aspect of epidemic control. Failure to do so is what renders much of decision-making in epidemics so irrational and inefficient. Facing our fears is as important as knowing biology. “
The likely hood of the Coronavirus becoming endemic worldwide is very high, but the human cost is largely to the elderly with pre existing conditions.
Given that roughly 80 people over 65 in this category die every day in New Zealand, more in winter than in summer, once herd immunity builds up and a vaccine is available there will be little change in morbidity figures..
What the media tell us is that 2 persons died of Corona virus yesterday !
not that 80 persons died yesterday and two died with not of Coronavirus.
If infection spread without controls the report would have been 200 persons died yesterday with coronavirus instead of 80. for a month or so.
Tf we are economic rationalists we should let the virus loose take no protective measures.
the resulting death toll will see a rise in the natural death rate among the elderly of 2 to 3 times the normal morbidity over a period of many months, if Italy’s results are anything to go by. Herd immunity quickly builds up.
In the long run the government will actually save money, about $3 billion per annum in reduced health and superannuation costs for the reduced elderly population that will now be immune to the virus..
Once herd immunity has built up the Coronavirus like the Flu will become part of the “normal” health risk
Overall Mortality may increase slightly.
2019 mortality ex Stats nz
death rate /1000 death rate /% pop/1000 pop deaths
0-4 Years 1.07 0.107 305.78 305780 327.
5-9 Years 0.09 0.009 329.38 329380 29.
10-14 Years 0.16 0.016 322.88 322880 51.
15-19 Years 0.42 0.042 314.61 314610 132.
20-24 Years 0.6 0.06 337.3 337300 202.
25-29 Years 0.59 0.059 359.99 359990 212.
30-34 Years 0.76 0.076 337.78 337780 256.
35-39 Years 0.86 0.086 311.88 311880 268.
40-44 Years 1.24 0.124 295.28 295280 366.
45-49 Years 1.99 0.199 325.36 325360 647.
50-54 Years 3.15 0.315 313.28 313280 986.
55-59 Years 4.52 0.452 316.02 316020 1428
60-64 Years 6.52 0.652 278.78 278780 1817
65-69 Years 10.22 1.022 240.88 240880 2461
70-74 Years 16.5 1.65 204.35 204350 3371
75-79 Years 28.81 2.881 142.78 142780 4113.
80-84 Years 52.64 5.264 92.72 92720 4880
85-89 Years 104.81 10.481 56.19 56190 5889
90 Years+r 211.99 21.199 32.12 32120 6809
pop over 65 769040
deaths over 65 27526. 34253
daily deaths tot 94
daily deaths over 65 80
One of the assumptions in the Boyd, Baker et al. (2017) model which appears to have been uncritically adopted as its sole guidance by our government is a valuation of NZ$45000 per QALY (quality adjusted life year) saved.
The government’s strategy is aimed at, and depends on, total eradication of the virus from New Zealand. Maybe this can be done. Maybe, and a bigger “maybe”, the virus can be kept out until an effective and safe vaccine has been administered throughout the country, which may be a very long time off.
In the meanwhile the virus will become endemic, low level transmission, throughout the rest of the World. It may well continue to circulate under the radar in New Zealand – not unlikely, most infections are asymptomatic or mild, and even the severe cases have a non-specific presentation, looking like any other respiratory viral infection.
WIth either leaks of quarantine, unrecognised local transmission or both, together with a population which has remained susceptible, we will be set up for ongoing outbreaks. What then? Ongoing or recurring lockdowns?
This afternoon’s news broadcast included a staement from the Director-General that all New Zealand rest homes had adopted the policy of isolating new admissions for 14 days, and of having no visitors, no shared meals. Yesterday there was a comment about the deaths at Burwood from which family were excluded to the effect: “They did not die alone, there were caring healthcare staff with them.”
Reblogged this on The Inquiring Mind and commented:
Michael Reddell has an illuminating post on the economic dimensions of the pandemic and the lockdown. The thread is worth a look