In my post late last week I wrote about Martin Lally’s attempt at a cost-benefit analysis around the current government’s strategy of eliminating Covid from (the wider community in) New Zealand. I was interested in it as much as anything because there was, and is, no sign that the government – or official agencies (notably Health and Treasury) – has attempted anything of the sort. As I noted in the body of the post, whatever view one takes on events of the last six months, decision-making from here requires a genuinely marginal analysis, setting aside sunk costs and benefits and focusing just on things that can be controlled or influenced from here on, by New Zealand.
Prompted by that observation, Martin Lally modified his paper slightly to introduce an explicit forward-looking dimension (both versions are now linked to in the earlier post). He ended up with this strong conclusion
“Switching to a Sweden-style approach is therefore clearly warranted.”
For various reasons, I didn’t think his analysis supported such a strong conclusion. But as I said in the earlier post, and will no doubt reiterate at the end of this, I don’t have a strong view myself on what the appropriate approach for New Zealand now to take is. And that is so even though if a coordinated global lockdown for six weeks would in fact wipe out the virus – and I don’t purport to know if it would – I could imagine endorsing such an approach. New Zealand voters, New Zealand governments, have to take the rest of the world as it is, not as we might wish it to be.
Probably like quite a lot of other people, I’ve spent a fair amount of time over the last few days trying to think through even how to think about the best answer to the “what approach should New Zealand take?” question. I was prompted initially by the columns by Matthew Hooton and Kate MacNamara in Friday’s Herald, but I’ve been trying to work through my own thoughts, not theirs.
There are too-easy approaches on both sides of the arguments. As one extreme, there was this the other day from a Nobel (Memorial) Prize winning economist.
Which demonstrates about as little as, say, contrasting New Zealand’s expected fall in June quarter GDP (about 15 per cent) with the (much smaller) reported fall in Swedish GDP, and in turn contrasting those numbers with the respective number of Covid deaths. Neither set of comparisons sheds almost any light at all, even on the handling of the last 5-6 months, let alone on the way forward. Samples of one comparator rarely do, unless you are really confident that in all other respects your comparator is near-identical to your country.
But I’ve increasingly come to wonder whether GDP comparisons can tell us much at all for these purposes. Perhaps they would do so, at least in principle, if governments only took – or failed to take – public health measures, but in fact they do palliative economic stuff as well. In principle, it isn’t that hard to keep measured GDP up even in a tight lockdown – all sorts of government-funded make-work activities could achieve that (measured) effect. But even without going to that extreme, a government that throws huge amounts of income support at people whose normal business/work is impeded by lockdowns – or private social distancing – will, in the short-run, generate more GDP than an alternative strategy (simply not letting people starve). And yet in doing so it constrains future fiscal policy choices – real choices around government goods and services and future income support and taxes – in ways that won’t show up in short-term GDP calculations, perhaps not even in long-term ones.
No actual advanced country government has gone to either extreme – keeping GDP all the way up “artificially”, or providing just enough support to avoid starvation – but there is quite a range of support measures that have been put in place, differing in generosity, duration, incentives effect, etc etc. And it is very hard to do good cross-country comparisons. I noticed on Stuff an op-ed from the local economist Shamubeel Eaqub. He seems to be a supporter of the current elimination approach, and believes it is a win-win (health and economics approach). In many respects his short article is a not-unreasonable discussion of some of the issues. But then notice this line, used in discussing this year’s economic outcomes for New Zealand and Sweden
The scale of fiscal stimulus has been larger than in Sweden. The IMF’s tallies show Sweden’s stimulus of 11 per cent to 17 per cent of GDP, compared to 21 per cent in New Zealand. It is difficult to tell how much of the difference is because of the public health approach versus other considerations. But the fiscal stimulus is around $15b to $33b larger, some of which will be simply spent (for example wage subsidies), while others will add infrastructure and future economic growth. These are not yet possible to tease out – but gives a sense of the difference in government response.
Which on the one hand acknowledges that our economic outcomes might in part simply reflect a choice to put more of a fiscal mortgage on our future, but on the other fails to distinguish what has been spent over recent months, what is just provisions either uncommitted or for future years, let alone the composition of that support. The New Zealand government’s total commitments might be 20+ per cent of GDP, but what has been actually paid out this year is some relatively modest fraction of that. Presumably there are similar issues with every country’s numbers. In New Zealand the immediate relevance is the point many commentators have made: as the wage subsidy ends it is likely our economic activity will fall away, independent of any different choices around public health interventions.
There are similar issues down the track. For example, Lally attempted to use the comparison between The Treasury’s December 2019 and May 2020 economic projections as a base for thinking about what economic difference the health intervention might have made. But if fiscal policy can support incomes/GDP in the short-term, as it has done this year, macro policy more generally (fiscal and monetary policy) can support demand and activity over the sort of multi-year horizon (a) Treasury’s forecasts looked at, and (b) that we realistically face on current policies, given the needed border restrictions. A sufficiently aggressive macro policy could get us back to full employment fairly quickly, and if Treasury or the Bank don’t forecast that that is a reflection on expected stabilisation policy choices, not on the merits, cost, or otherwise of the elimination strategy. And, on the other hand, even achieving full employment that way might result in its own distortions.
It is likely that a national elimination strategy will lower potential output relative to the pre-Covid counterfactual but that effect might be quite modest, relative to the gains from getting actual output and employment quickly back to potential. And it still doesn’t answer the question – the important economic question – of whether, for New Zealand, a national elimination strategy will lower potential output (including per capita) over (say) the next five years in total by more or less than some mitigation strategy would. And again, specifics are likely to matter. If you are in an economy in which foreign tourism matters enormously the answers may differ somewhat than if your economy is one that prospers almost entirely by exporting things (without needing much people movement). “May” in part because we don’t know how much travel would occur voluntarily even if travel were relatively unrestricted among a (hypothetical) group of countries pursuing something less than elimination. European evidence this (northern) summer suggests that would not be close to zero.
And as I noted the other day, one of the biggest problems in all this is that no one – certainly no one championing the elimination strategy – can articulate a credible exit strategy from the regime of tight border controls, with – in effect – heavy effective taxes on people who do move. I read an interesting piece on Newsroom this morning by a journalist who appears to have fully convinced himself of the case for the status quo. But there was no discussion at all as to where and how it all ends. We cannot – it seems from all I read – simply assume a widely available fully effective vaccine in short order. We cannot, it seems, simply assume the virus will go away in short order. And we cannot assume the rest of the world suddenly adopts strategies that might lead to general suppression and/or elimination.
Now perhaps we can move to a model in which the testing at the border is finally being done consistently, competently and comprehensively – as we were promised a couple of months ago – so that the threat of lurching into fresh lockdowns with no notice (and, evidently, with grossly inadequate preparations by ministers and officials) is largely, if never completely removed. That sounds more or less plausible. But it had better be true, since the fresh uncertainty that last week’s episode reintroduced is itself no small thing.
But even managing that won’t change the border being largely closed, indefinitely (even if at some point there is a pleasing travel “bubble” with Taiwan and the Cook Islands). At a personal level, the border doesn’t greatly affect me now. I wasn’t planning on going anywhere any time soon, and I’m among what might be a small minority of New Zealanders (let alone resident foreigners) with no close relatives living/working overseas (very few distant ones either). No one in my family depends on the tourism sector. But some 28 per cent of people resident in New Zealand are foreign born, and a fair chunk of those born in New Zealand in recent decades are now living overseas. A large chunk of people work in businesses that depend on foreign tourism, export education etc.
Personal connections matter, even if they don’t show up in GDP numbers. Weddings missed, funeral missed, Christmases not shared, grandchildren/grandparents not hugged all matter. They are the sort of things that make for a full life. And sure technology helps, but no one really thinks it is the same, not for years and years anyway.
Now, a reasonable counter to these points is a reminder that New Zealand can only control what we do. The rest of the world will do what it will. Australians aren’t even free to leave the country at present – whether for New Zealand or anywhere – and won’t let New Zealanders in anyway. They’d presumably be even less likely to if we took a mitigation path instead.
If I were really forced to make a pick, I would probably go with the view that a well-managed elimination approach will have a lower GDP cost (even with all the caveats above) than a mitigation approach. But no one really knows do they? As an example, case numbers and deaths have tailed off in Sweden too, but no one knows whether that is sustainable, or what the longer-term costs of their (private and government) restrictions and distancing measures might be (or what they might be applied to another country, like New Zealand.
And then one is still left trying to weigh the other costs and risks and implications of what maintaining the elimination strategy might mean, especially if we continued to have a government that didn’t do the basics well and then relied on extreme measures to contain relatively limited outbreaks (as happened in April – recall the toughest lockdown in the world, the ban on swimming, the ban on funerals). Tough restrictions might be tolerable in a very time-limited scenario – the big wave of the 1918 flu in New Zealand swept through in about six weeks – but we are already months into Covid and, to repeat, there is no obvious end in sight.
There is a group of people – presumably mostly on the left – who seem only to happy to coerce populations without limit, talking (for example) of mandatory masks apparently indefinitely, or constraining capacity on individual buses and trains while doing nothing to increase capacity, or having lockdowns on a whim (even with compensation). These same people are probably also quite happy to have people increasingly dependent on the grace and favour of governments, for handouts (new wage subsidies), for favoured stimulus programmes (the reward to lobbying and connections), and who are quite unbothered by – for example – banning the public celebration of Easter this year, even outdoors, even in modest gatherings. Or banning funerals, some of the sorts of things that define our culture, our humanity. There are people, even on the right, who seem only too happy to have privacy protections tossed out the window, allowing the state to track us all for the (indefinite) duration. Of course, Covid is not some conspiracy to enable bigger more powerful governments – any more than, say, World War Two was – but it, and the indefinite elimination approach, tends to have that effect anyway.
There don’t seem to be easy answers. I – unaffected much by the border – might prefer something like a highly-capably managed version of our elimination approach for now. If it works, we mostly keep our freedoms, even if we are poorer. There is also the option value of waiting – if we abandon the elimination approach, it would be expensive to reinstate it later, and there are no commitment mechanisms to keep a government to a mitigation path after once it decided to try it.
But I can understand that for many the freedom to travel – without huge effective taxes – is one of the important freedoms. And again not one really captured in GDP.
I haven’t said much here about the likely increase in lives lost (and impairment of quality of life for some who didn’t die) were we to move to a mitigation strategy. That is not because those effects are unimportant. I touched on them in the earlier post, but I don’t purport to have a distinctive perspective on anything around how the virus itself might then progress through New Zealand. But again, the absence of a credible exit strategy puts those costs, those people (who could be you, or me, or our families) in a different light. One parallel that struck me some months ago were the lives we put on the line in World War Two. No one really wanted a war, but in the end no one could see a satisfactory outcome unless we committed to war, knowing that would involved – almost certainly – large losses of lives of young men (mostly). The parallel isn’t exact by any means, but I still find it worth reflecting on.
This has all been rather discursive, and inconclusive – as much about helping to sort through my own thinking as anything else. To repeat, I am not championing any specific strategy for New Zealand at present. And I remain worried about the apparently weak levels of capability in our public service and political system to evaluate options and/or effective and efficiently operate whatever option is chosen from time to time.
For those interested in understanding Sweden itself, I saw a link the other day – I think on Marginal Revolution – to this interesting, but avowedly incomplete, look at some of the distinctive features of the Swedish experience and system.