A couple of weeks ago I signed up to follow the Ministry of Health on Twitter.  Seemed a sensible thing to do: coronavirus and all that.

Since then I’ve been interested to watch their messaging very slowly change.  Two weeks ago (28 February) was when the first New Zealand confirmed case was announced.   We got this

By the next day they were so relaxed about the virus they took to tweeting woke public service stuff

Pretty sure that even then the disease had killed a lot more people than “fears, rumors & stigma”, but…well…presumably that wasn’t Dr Bloomfield’s view.

On 1 March, we had the “wash your hands” message

and there wasn’t anything on 2 March.

But by 3 March, it was time for some more off-topic political rhetoric from another government agency. the Ministry retweeting this.

Here was the 4 March messages

Never have they given us anything substantial to justify their view that the “risk of widespread community outbreak” not only is low, but is expected to remain low.   Small matter of all those other countries, including ones that had much the same border restrictions we did.

By 5 March we had

Probably (a) really up to the public, and (b) any reviewers when this is all over, to decide whether things are being well-managed, but we know that the Ministry’s prime communications objective (stated in the pandemic plan) is to maintain confidence in themselves, whether justified or not.

Also, much as we might sympathise with that family, surely the Ministry of Health’s prime task isn’t those individuals but the safety and wellbeing of the wider public?

There wasn’t anything much on their feed for a few days, but then there was this

Which displays no sense that the Ministry recognises that while it knows about the cases it knows about, it doesn’t know what it doesn’t know. There was also this.

Given the rate at which the virus was spreading globally, it wasn’t clear quite what evidence they had for their misinformation claim.

(Although perhaps they had in mind the Director-General’s several claims around the time that asymptomatic transmission of the virus simply isn’t a thing, a stronger statement that what was made in the WHO report he claimed to draw on, and not consistent with the views of a bunch of other international experts.)

And by 10 March we have this

Talk about confidence: “just wash your hands and don’t worry”.   Oh, and by the way we are so confident there is no risk that they actively advise people not to “stock up”  (not even just “not panic buy”).  I imagine most people have done as I have and ignored their advice.  After all, wouldn’t want chaos in supermarkets if/when community outbreak becomes a thing or when much greater social distancing is mandated.

Here they are on 11th. Public events finally come into view.

Then yesterday, there was a change of tack from the Ministry

The “risk is low” message had been dropped, and the asymptomatic transmission message had been toned down.

And what of today, the 13th?

The ground seems to have shifted quite a bit.  No attempts to downplay risks, no reaffirmation of the risks being low, just some advice about hygiene etc things to think about in deciding whether or not to go.

And to read Dr Bloomfield’s press release today there is also quite a different tone coming through

“Our key advice, which is fundamental to our response, is not putting yourself or others at risk if you are unwell. This means not going to work or going to places where there are other people if you are sick. All of us have a role to play in stopping further spread. I need to emphasise how critical this is as New Zealand responds to COVID-19,” says Dr  Bloomfield.

‘This is particularly important for concerts and other large gatherings we have coming up, including this weekend. Please stay home if you’re unwell.’

Having said that, I went and looked at the Ministry’s website, and there it still says

With continued vigilance the chance of widespread community outbreak is expected to remain low.

But with not a single sentence to justify the Ministry’s view.

People seem to speak highly of Bloomfield. Personally, I tend to be a bit sceptical of anyone appointed by Peter Hughes (State Services Commissioner) and as a mere curious citizen haven’t seen anything much to allay my unease in the last couple of weeks.  In its public communications, the Ministry seems constantly to have been playing down risks as much as they can –  even as the global situation deteriorates rapidly, and Australia’s situation worsens.    It seems fundamentally unserious and it seems not at all consistent with the ideas of an open society, transparency and challenge.    And frankly it undermines confidence in whatever the Ministry will be saying through the next phases of this crisis.  Whatever actual expertise some of them no doubt have, they risk coming across as unserious and not interested in levelling with the public.  (Same goes for some of Bloomfield’s comments about some east Asian countries that seem to have checked their outbreaks for now: no sense of engaging with the public as to what it would take (resources, commitment, compliance etc) and for how long, to even hope to emulate those stories).

Wouldn’t it have been good to have seen the Director-General engaging on, for example, the deterioration in the Australian numbers, directly confronting the facts that (a) there is an open border between the two countries, and (b) a fair amount of travel each way all the time and addressing the implication that we might, in effect, really be considered as being in a Common Virus Area with Australia.  If so, the complacency about New Zealand risk might be particularly worth challenging.

And wouldn’t it be good if Bloomfield –  or the Minister of Health or the Prime Minister –  fronted with the public about the very real challenges the health system will face if we get a serious outbreak here (low number of ICU beds per capita, looking at the Italian experience etc).  That is what good, honest, effective-over-time communicators would do. It is the sort of thing that over time builds confidence: a view that, for example, while officials may be optimistic now (rightly or wrongly) they have thought hard about what might happen, and aren’t just trying to sugar-coat their messages and keep the public quiescent.

Wouldn’t it be good if they could effectively and openly articulate for the public the “flatten the curve” strategy that drives so much of what is going on?

I really hope that what we don’t see is better than what we are seeing.  Because what we are seeing seems complacent and uninterested in genuine openness and engagement.  And that is no way for a democratic society to be operating, in which we simply defer to officials, take what they tell us only when they tell us, and not bother our pretty little heads about other stuff.

Here in New Zealand we are waiting for the details of the government’s promised economic package, which –  we are told –  will be tightly targeted and focused on the industries that particularly suffered from coronavirus.

Even to write that sentence, is to recognise how absurd a position the government has put itself in.     They seem –  no real doubt about it, their own words say as much –  focused almost wholly on the firms/sectors that suffered from China’s experience with the coronavirus, even as something so much bigger is already beginning to sweep over us.  China, after all, if not remotely back to normal, is offering practical assistance to Italy.   That outlook was something the Minister of Finance and, even more so, the Prime Minister have consistently refused to face.  Perhaps they’ve known it internally –  there must, surely, be some good adviserssomewhere –  but nothing they’ve said in public has prepared New Zealanders for the reality of what is unfolding, and what is likely to happen in the coming weeks and months.  (Our media don’t seem that much better: the Herald today has a full page story on the front cover “The World Faces Reality”, but readers will still have little or no sense that the economies of many countries are about to substantially shutdown.)

Whether or not we get serious outbreaks here –  and who aside from the Ministry of Health would be willing to punt on us not – the New Zealand economy will be severely –  really really severely –  adversely affected.   And there is very little that economic policy tools, macro or micro, can do to lean against or mitigate that loss.  Economists have talked for years about the benefits of exchange, specialisation, personal interactions etc etc.  But for the next few months the emphasis seems likely to be increasingly on keeping your distance, hunkering down.    Huge amounts of output just are not going to happen, and there will be hardly a firm or sector not really severely adversely affected.

Whether or not the government’s plans were reasonable when they were first being conceived –  and just perhaps they might have been six weeks ago –  surely now is the time to bin that package they were planning to announce next week.  They need to start over, facing the reality now before us, not the (now rather limited) shock that first faced us (and certainly hit some individual sectors hard).

Sensible policy responses now –  whatever they choose to do around further border closures –  look much more appropriately focused on immediate crisis management.  In other words:

• ensuring the income support is going to be readily and effectively available for the many (especially low income) people who won’t be able to work from home or who will have exhausted their sick leave (and any ex gratia generosity employers may still be able to offer). That might require legislation: if so, pass it,
• ensuring that the food distribution system is going to be reasonably robust if we go through closed-down periods (in an early post here, I recounted an anecdote from an early phase of pandemic planning that scared me then: big supermarkets typically only have 1.5 days of sales in stock at any one time),
• spending/doing whatever can still usefully be done to prepare for possible severe health system stresses (rather than just happy talking the public about how well prepared they are –  for 100 cases I’m sure, but not for several thousand).

and so on.

Now, sure there are probably other things to do.  The Reserve Bank should be cutting the OCR (for all the reasons I outlined yesterday) and they need to be prepared to roll out liquidity support type operations if financial sector funding stresses start affecting banks here.

But you simply cannot plan to target individual firms, when almost every firm is going to be engulfed.  It would inefficient, unmanageable, and would simply to fail to recognise the magnitude of the coming losses.

And there is no point in thinking of huge fiscal outlays, as general stimulus, right now.    If the government was going to plan to actually purchase physical goods and services well (a) what would it do with them?, and (b) soon enough, the capacity of the economy to deliver much (workers at work, functioning distribution systems) are going to be severely impaired.  And – the more likely option –  simply putting money in people’s pockets, whether by cash grants or tax cuts (GST or low income thresholds on income tax) aren’t likely to achieve much systematically useful either.   For a start, if you are sensible then in such a climate you won’t want more people eating out (say) or moving around holidaying, or going out to big sports matches or concerts (classic discretionary items).  And even if online retail really was still fully functional locally, it just isn’t that large a share of New Zealand retail.  More generally, quite-rational fear and uncertainty about the future will have people pretty reluctant to spend anyway.   That is sensible and prudent, and not really something governments should now be trying to undo –  even if our happy-talking Prime Minister was the other day encouraging people just to go out and spend.       We need to start thinking in terms of the deepest contraction in economic activity any of us –  except perhaps the handful still alive who experienced the Great Depression-  have ever seen.  It is the price the world is going to pay to “flatten the curve” (something we’ll come back to).

Big stimulus is probably going to be appropriate and required as and when the worst of the virus is past us, and people are genuinely and rationally able to see some light at the end of all this, building on the fundamentals already at work by then, speeding up the recovery.  Ideally, that would be a mix of fiscal and monetary policy, bending over backwards to help get economic activity levels back to normal.  So use the time now –  you’ll have plenty –  to prepare for that sort of strategy  (and perhaps for the inevitable bailouts and recapitalisations our politicians will find themselves unable to resist –  anyone suppose that if it comes to that governments of either stripe would let Air New Zealand fail (but I hope at least they wipe out the private shareholders if it does happen)).   It might even be time to consider changing a few individuals at the top (poor generals are found out in wartime and, in good armies, quickly replaced).

On the fiscal side, make sure  –  for example –  that a universal lump sum cash payout to all residents could be made (from the outside hard now to see how it could be done).  Ensure that a temporary GST cut could be implemented quickly and smoothly.  And insist that the work is done to largely remove the near-zero effective bound on lower interest rates. It can be done  –  it should have been done, here and abroad, five years ago –  and failure to act will simply unnecessarily hold back eventual recovery (and reinforce those downside risks to inflation expectations that I’ve often worried about here).

One of the key things we all have to recognise is that this situation is not going to be resolved any time soon.  For hints of that we can look to China.   Sure the new case numbers and new deaths have come right down –  more infections this week, I think, from arrivals from other countries than locally –  but nowhere are things back to normal. In Wuhan it seems that recovery has barely even begun.  Look at successive waves of things like we are now seeing on Italy –  or early signs in other countries too –  and there is going to be no confidence (including about travel) and no certainty for a long time.

But perhaps even more importantly, remember that the virologists etc talk about the goal of current interventions being to “flatten the curve” .  This is perhaps the best version of the stylised chart I’ve seen, in a new article from the economist Richard Baldwin.

Perhaps it is a little cluttered, but it is trying to convey a lot of information.

The solid red line is a stylised representation of how new case numbers would look if there was no containment (given that there is no effective treatment).  You’ll have heard of experts talking of how if that happened perhaps 50 per cent of the world’s population would be infected before too long, since none of us has any natural immunity and the virus seems to spread easily.

The real worry in that scenario is the dotted red line –  people needing ICU-level care.   And this perhaps is where the chart is too sanguine.  On this version, the area under the dotted red line, and yet above the ICU bed capacity, is small relative to the total ICU demand.  But if 5 per cent of cases need ICU-level care (seems about right from what I’ve read) then it is worth remembering that New Zealand, for example, has about 175 ICU beds.   Perhaps with valiant efforts those numbers could be doubled in an emergency –  but doctor numbers can’t – but even that would mean that, if no one else was in an ICU bed at all, our system would be overwhelmed at 7000 cases at the same time (5 per cent of 7000 being 350).  That might seem a lot of cases, but recall that 50 per cent of New Zealand’s population is 2.5m people.

So trying to flatten out the curve is about trying to avoid the forced medical rationing already evident in the high-quality northern Italy health system and, presumably in the process, reduce the overall death toll (very old people will get treatment and as a result some will live who might otherwise have to be left to die). If the curve could be flattened out, by aggressive containment etc measures, the aim –  highly stylised –  is to produce something like blue line, where the ICU demand never quite exceeds the physical capacity.

But what isn’t often mentioned –  although it is quite clearly implicit in the stylised chart –  is that the aggressive containment measures don’t necessarily alter the likelihood that –  at least unless there is a widespread vaccine available next year –  many of us will still get it in the end (something like 50 per cent is still the number  – the sort of thing Angela Merkel said to the German people the other day).  It is just a matter of time, of stretching things out, and (thus presumably) of repeated waves or outbreaks in different physical locations.  Take Italy as an example, the current situation looks horrendous, but case numbers are not even close to 1 per cent of the population.

And, unless that narrative changes markedly as we learn a lot more, that seems likely to be the sort of scenario every country faces, in one form or another, for the time being.  There is nothing to suggest –  since no likelihood of a vaccine in that time –  that the problems/risks/disruptions will ease this year.  And the end of the year is still 9 months away.   Turning back to the economics, a great deal of economic output and wealth can, and probably will, be lost in that time.  It means –  sadly –  that there is likely to be plenty of time to think about planning for serious stimulation as we get to a recovery phase.   How many people are going to be keen to book travel, even if borders stay open or re-open and flights are still there?  How many people are going to be keen to spend (precautionary savings will look very rational for many if they still have an income)?  And who is going to be ready to commit to start investment projects, even if either debt or equity funders were willing to release the funds needed?

It isn’t hard at all to see New Zealand’s GDP for the rest of the year being perhaps 10 per cent lower than otherwise (that isn’t a forecast, just an attempt to suggest that the ballpark numbers people should be working with are very very large.  That alone would $25 billion of income lost that is mostly never coming back – even if next year we resumed the pre-crisis growth/income path – and losses which have to be (a) borne and (b) distributed. There will be significant business failures. There will be heavy job losses.  And, despite my scenario, it is not as if anyone –  government or private –  can safely plan on the losses being limited to this year and everything being pretty much normal thereafter.

There is a pressing need for the Prime Minister and the Minister of Finance to get real about the magnitude of the economic (and probable social) disruption we are going to face, the price we pay –  even though much of it will be out of New Zealand’s control –  to manage the virus.  Front the public and explain why now is no time for a limited backward-looking package, but for something much more dramatic and whole-of-nation crisis focused, with a time horizon that stresses that “normal” will almost certainly be some considerable time away.

Any guesses as to which country currently has the highest number of coronavirus cases per capita?   I’d have got this one wrong, until I happened to spot a table yesterday with some numbers for San Marino.

Anyway, here are the top ten for total cases per million people  (data updated to 1pm).

Leave out the tiny countries/territories and the next few are Switzerland, Norway, Singapore, Sweden, and France.

On these standard lists of countries and territories –  no matter how tiny –  there are about 230 countries/territories.  At present, New Zealand is about 60th (ie lower end of the worst quartile –  probably not the impression you’ve had from the Ministry of Health or ministers).  Here is a chart of which countries are, right now, just a bit better/worse than New Zealand.

Australia, with which we have a pretty open border and lots of movement across it, has about three times the cases per capita.

I’m not sure that the per capita numbers mean a great deal, especially when very small absolute numbers are involved.   One infected family or small cluster here and we’d quickly go shooting up past Taiwan, and despite the confidence the Ministry of Health (and their Minister) keep expressing in public, neither they nor we know what they don’t know.    They presumably know most of the contacts of the people with confirmed cases, but none of the contacts of the cases they don’t yet know, let alone the contacts of those contacts.  It is striking how much open alarm there now is in the United States –  active cancellation of events, top universities moving to online only etc – even though in the per capita ranking the US isn’t much different than New Zealand (in fact, as recently as Saturday morning was a bit further down this unwelcome league table than us).    Perhaps it is a reminder that three weeks ago, Italy had no confirmed cases and now (eg) million people and the heartland of the Italian economy are in quarantine.  Two weeks ago, Italy had the same number of confirmed cases the US has now.

Of course, the other aspect of some relevance is the trajectory of cases numbers over time.  Singapore, Hong Kong, and Taiwan all have had more cases per million than New Zealand.  A few weeks ago there was a real fear of an exponential increase in those places, perhaps especially Hong Kong, where the travel restrictions from the PRC had been imposed only fairly sluggishly and the numbers moving were large.   And yet in all three places, the exponental increase hasn’t happened.   In fact, in Singapore and Hong Kong more than half of all the people with confirmed cases have now recovered.  Presumably the virus isn’t any different, so we should look to behaviour, policies and practices.

Our government and Ministry of Health like to talk up the travel ban, but (eg) Hong Kong never really had one (and places like Australia and the United States did).   What seems much more striking about Singapore and Hong Kong was the extent of social distancing that has been practised for some weeks now.  In Hong Kong’s case, schools and universities were closed. In Singapore, they weren’t but reports suggest huge numbers of people working from home etc.  That also seems to have been the lesson in how the PRC got on top of the virus, notably outside Hubei province.   I like to reason by reference to cross-country comparisons, and so it surprises me how little of the debate or media coverage here is looking through the range of other advanced country experiences.  Instead, we seem to get endless backward-looking upbeat comments from the Prime Minister, Minister of Health, and the Ministry of Health, who seem only interested in encouraging anything much more than hand-washing when it is confirmed that things really are much worse in New Zealand.  They seem reluctant to (a) acknowledge what they don’t know, (b) the nature of incubation periods (if/when things are confirmed to be much worse, we’ll wish policies and practices at least a couple of weeks earlier had been different.   There is a line I read recently that suggested that whatever a country does before a pandemic really breaks out will seem too much, and whatever it does afterwards will seem too little.  With other country’s experiences to go by, it isn’t obvious why our authorities are encouraging such a relaxed attitude.   Surely none of us wants to end up a Lombardy?

Where, of course, ICU beds are a real constraint, so much so that over the weekend there was mention of an Italian technical discussion document mooting the possibility of denying ICU care the very old.  I also happened see this chart over the weekend.  (Assuming these numbers are roughly comparable, you have to look a long way down this chart to find New Zealand.)

All of which is a bit of a distraction from the main –  economics and economic policy –  focus of this blog.    I’m running late today because The Spinoff asked me to write a short piece this morning elaborating some points I’d made earlier in a radio interview.     Here is what I wrote there, with some elaborations and additional points I didn’t have space for.

The economic implications of the Covid-19 public health emergency are formidable, and are growing by the day.

Most of what we’ve seen in New Zealand so far relates to the epidemic stemming from China and the steps taken to get things under control. Much of the policy discussion, including recent comments from the minister of finance, seems to have focused on attempts to assist firms and individuals in sectors which directly affected.

But that approach risks being a big mistake. It might have been fine if the only material outbreaks of the virus had been in China, and once they got things under control it was only a matter of time – albeit perhaps months – until those specific sectors and firms can get back to normal. But that simply isn’t what we face. Only yesterday the Italian government quarantined one of the major industrial regions of Europe.

Realistically, we have to suppose northern Italy won’t be the last place where life and production will be severely disrupted.  The trajectories of case numbers in various other European countries seem, to date, disconcertingly similar.  And then there is the United States.

Public health experts tell us the virus can be checked, but only with expensive and disruptive restrictions – voluntary or imposed, here or abroad. In her latest column here, Siouxsie Wiles notes:

Another thing we are all going to need to start doing soon is minimising or avoiding contact with other people. This is called social distancing. If you are greeting people, don’t hug, shake hands, hongi, or kiss. Bump elbows or feet instead. Work from home if you can. Much as it pains me to say it, social distancing also means avoiding public transport (get on your bicycle!). Similarly, it means avoiding gyms, churches, cinemas, concerts, and other events and places where people congregate.

Already, airlines report that forward bookings have dropped away sharply, and foreign tourism is heading towards zero for a time. It won’t be the only severely adversely affected industry, and the effects will be felt widely.

I found it very interesting that Wiles –  who seems to know whereof she speaks on the viral things, and seems to be no panic-monger –  was prepared to use, of New Zealand, the words “we are all going to need to start doing soon”.  That isn’t at all the message our happy-talking political and official leaders are giving.

Economic policy needs to be focused not primarily on the limited and concentrated economic disruption we’ve already seen. Instead, ministers and officials need to focus on the much, much larger, but scale-uncertain, losses and disruption that will soon break on us, and on vulnerable individuals rather than firms. As importantly, we need to be positioning ourselves to ensure that when the epidemic passes – and that could be some time – we are positioned to get overall demand and economic activity back towards normal as soon as possible.

Much of the economic loss and disruption we are near-certain to face over the next few months is now all but unavoidable. Nothing we do will put tourists back on plane, or open up supply lines from Milan, or whereever the next place to clamp down severely is. When people choose to stay home and maintain those distances, spending and economic activity will drop. It is the price we will pay as governments here and in other countries seek to spread out and reduce the incidence of the virus itself, and as individuals seek to limit our personal risks.

This point cannot be made too often.  Between choices here and individual and policy choices abroad much of the economic disruption is simply unavoidable.  There will be large losses of production, significant jump losses, material numbers of business failures, and significant permanent losses of wealth.     Much of what any spending can do now is really more (re)distributional in nature, than about changing the short-term course of GDP.   There is place for such distributional measures –  we don’t want sick people at work who can’t afford to take time off –  and in my view short-term measures should probably focus on income support, erring on the generous side where necessary.

Trying to directly assist individual firms is a fool’s errand. We just don’t know what we will be dealing with just a few weeks from now. Very soon the number of firms that can plausibly claim adverse effects will be huge. We simply don’t have the capacity to administer complex tailored schemes for huge numbers of firms, and the way would inevitably open up to all sorts of rorts and abuse.

To repeat, facing what is likely to unfold over the next few weeks or months, we need systems that are clean and relatively simple, and don’t rely on either government or the recipient firms being fully resourced to manage them.

That is why we have macroeconomic policy tools, which are designed to operate pretty pervasively when activity across the economy is hard-hit.

Monetary policy is typically the main one. The Reserve Bank is already quite badly behind the game in not having cut interest rates. No doubt they will do so later this month, but they need to cut the OCR hard, and to err on the side of what might look like doing too much. The risks of actually doing too much are slight, and the risks to falling short are substantial. Among them is a risk that expectations about future inflation drop materially further, which would raise real interest rates in the face of this severe and complex shock, greatly complicating the eventual recovery.

But monetary policy is approaching its limits. This is one of those (quite rare) times when monetary policy really needs to be supported by a significant and, when activated, fast-working boost from fiscal policy.

The OCR can probably be cut by up to 175 basis points.   Whether the last few cuts make any real difference, even to the exchange rate, is a contested point, but we won’t know if –  faced with big drops in activity in demand –  the limits aren’t pushed.

Big infrastructure projects are largely beside the point here – they simply take too long to get under way. One-off cash payments to households probably also aren’t the right thing, at least now. In the next few months people will be hunkering down anyway, and as I’ve already noted, a key consideration is providing support and confidence as and when the worst of the virus – and attendant direct economic disruption – has begun to pass. One possible tool, as part of a package, would be a significant, explicitly temporary, cut in the rate of GST.

Such a cut could be implemented quickly, would put more cash directly in the pockets of households, would operate in a somewhat progressive way (poor households spend a larger share of this year’s income than upper-income households) and explicitly encourages people to buy early rather than later (because you know prices will be rising again in, say, 18 months hence when the GST rate goes back up again).

This instrument was used in the UK in 2008/09.   The key point I’d add here is that in thinking about stabilisation and supporting recovery in the next 12-18 months we – including political parties from all sides of politics –  shouldn’t be focusing on our longer-term preferrred policy changes, but on things that are likely to do the stabilisation job (and can then probably be unwound –  as monetary policy).  That is also the way towards keeping a reasonable degree of cross-party consensus if the crisis is being welll-handled, rather than a sense that one side or the other is using the crisis opportunistically.

The key point now is that the government has to be looking forward, not backwards, and acting in ways that take seriously the sheer scale of the costs and dislocations we are just about to face. Whatever New Zealand does, we can’t avoid many of the short-term costs that are coming, but we can do a little to mitigate the damage (in an environment like this, for example, retail interest rates probably should be near zero, which they aren’t now) and official actions now can help create a climate most supportive of an eventual recovery. We need people to be confident of aggressive action focused on the real issues. In these circumstances, there are few or no returns to half-measures.

All manner of stresses and problems are likely to come to light, here and abroad, if this virus continues to wreak havoc –  or require far-reaching restraints (self or government imposed) over the next year or more – to keep it in check.  It would be foolhardy to assume that full recovery will be quick and easy, all the more so if macro policy has not done what it could to, for example, keep inflation expectations up.

I’m staggered at how the government and most of the media still seem to have a backward-looking approach to coronavirus, and the economic effects thereof.  When the New South Wales Minister of Health yesterday indicated that in his view successful containment was now very unlikely, one might have supposed this would be big news in New Zealand.  After all, not only are there lots of New Zealanders in Sydney, but lots of people travel to and fro each day, and there are no restrictions or isolation requirements on those travellers.  If –  and it is presumably still an if –  containment is not likely to be successful in Sydney then surely, given that we haven’t had travel restrictions up to now and are unlikely to put them in place on Australia, it isn’t likely to be successful here.  It was, after all, the Prime Minister the other day who talked (loosely no doubt) in terms of a “common border”.     But I haven’t seen or heard of any comment from any of our political leaders, and no media outlet I follow has highlighted the story even though –  if it is so –  it must have material implications for how life might unfold here very quickly.  (For example, there is a community festival just down the road from here on Sunday, which annually attracts 80000 people in a pretty confined space. I don’t go, but people who are planning to might want to rethink.)

On issues of substance most of our political leaders seem either missing in action or, again, mostly backward-looking, as if coronavirus is something that happened in China and we are now just working through over the next few months/quarters the economic consequences of what has already happened.   On the evidence to date it is far from obvious that the Prime Minister has what it takes to lead and effectively drive the national response to an emerging, highly uncertain, serious ongoing crisis.  The Minister of Health seems to be missing in action (which, one hears, is often how officials thought of him in normal times).  And who else is there?   Kelvin Davis? Winston Peters? Phil Twyford?   I’ve heard suggestions that Grant Robertson “gets it”, but there continues to be great reason to doubt that, whether in his speech last week, his Q&A interview at the weekend, or one with Mike Hosking this morning.  It is all focused on stuff that has already happened, and the outworkings of that, and not at all on the worsening outlook, and the near-certainty of huge disruption and cost when community outbreak becomes a thing here.    Thus he continues to talk about “measured proportionate sectoral” responses, when in reality much the economy is likely to be overwhelmed for a time by what is unfolding.  You get no sense of that from Robertson.

I was initially supportive of the travel ban the government put in place several weeks ago.  It seemed prudent, and of course the Chinese government had put its own restrictions on outbound tourism.  I see quite a lot of commentary about how that ban “bought us time” or “kept the virus out for several weeks”, and I guess in years to come researchers will try to unpick the evidence on that one.  But I must confess to being a bit more sceptical now than I was.  Canada, for example, had no travel bans of its own, and yet when I checked this morning they had about eight times as many cases as New Zealand…..and almost eight times the population.  (And are not far from Seattle).  Neither country seems to have done a great deal of testing, so it isn’t simply that one country was finding more because it was searching harder.   It is impossible to easily know the counterfactual, of course, but perhaps the horse had already bolted by the time the travel bans were put on?  Again, superfically it isn’t obvious that the UK experience (no bans) has been worse at this point than the Australia or US experience.

Consistent with my post yesterday, I remain deeply sceptical of sectorally-targeted or admin-intensive specific government interventions to assist.   I see that in today’s Herald Hamish Rutherford is championing those sorts of programmes, under a subheading “Govt must act now to help hurting sectors take heart”.   Frankly, it is never the government’s job to help firms or sectors “take heart”.  The head has to be what is engaged in times like this.     Debate around these issues isn’t helped by an ongoing refusal, pretty much all round, to call what is happening right now what it is: an economic recession.    We might not have hard data on that point for months (even March quarter GDP includes January where there was little or no effect) but here, now, in March it seems almost certain that the level of economic activity is falling.  It is almost certain to fall further, perhaps at times a long way.    Forget about every other sector, all the supply chain disruptions etc and just focus for a moment on travel.  These were some forward travel booking numbers for Australia published in The Australian this morning.

“Between Feb 24 & March 1, year-on-year, bookings were down 47% from UK, 52% from the US, 71% from Indonesia, 32% from India and 100% from China and Japan, along with widespread cancellations.”

Is there any reason to suppose the New Zealand picture would be much different?   Uncertainty is the enemy of new investment, and uncertainty –  pure uncertainty, not just risk –  is extreme at present.  At present, not even the Leader of the Opposition is willing –  quite –  to call a spade a spade.

In recessions, bad stuff happens.  Firms fail.  People lose their jobs.  Plans are wrecked or disrupted. Asset prices fall.  Government revenue takes a hit.  (Government financial assets fall in value: see NZSF).  It isn’t pleasant, and usually those who bear the brunt aren’t in any very direct sense causally responsible for what happens to them, or their firms.    Much of the argument for focused sectoral action –  there is a lot of this in Rutherford’s article –  is along the lines that unless all these firms and jobs are saved now, recovery will be materially harder than it needs to be: the capacity mightn’t be there to take up the recovery in demand.  But, again, all recessions are like that.  But it isn’t as if the capital stock is going away.  Motelliers in Queenstown might go bust – I saw one this morning quoted as saying he could cope with downturn in Chinese numbers, but it would be problematic if others stopped “and that now looks as if it is happening”.  But the motel will still be there.  A jetboat or paragliding or whatever company might fail –  and that is tough, the flipside of the success operators capture in unanticipated boom times –  but the physical equipment and the location are still there.  And since this seems to be a worldwide thing, even if staff have to move and look for other jobs, many (or a next generation) will be quickly enticed back for whatever drew them to (say) tourist work in the first place.

And while it might have been easy a few weeks ago to identify specific firms that had lost directly associated with the virus, those numbers are rapidly going to be overwhelmed as the effects spread across the entire economy  – just as surely, if indirectly, the result of the coronavirus, and measures to manage/avoid it.   In recessions, for example, property markets tend to do badly –  see the 15 per cent fall in real house prices in New Zealand in 2008/09 despite a 400bps fall in mortgage rates – turnover will drop etc etc, and real estate agents will quite genuinely be able to blame the coronavirus for the slowdown.

You simply can’t sensibly target each firm/sector in the economy.  It is why we have macro policy –  economywide instruments designed to do what can be done to stabilise the downturn (that may not be much) and then lay a platform for as fast a recovery in demand and activity as can be achieved.   As it is, it is simply bizarre that with all that is observably different since, say, December, and all that is pretty visible just down the track, our macro policy settings are barely changed:  short-term wholesale and retail interest rates haven’t moved, nothing about (short-term impacting) fiscal policy has changed, the exchange rate is certainly a bit lower (but a modest move by historical standards) and on the other hand it is likely that credit conditions are tighter than they were.   There is an urgency about action, but that action should primarily be focused at the macroeconomic level.

And, finally today, I have been wondering how one might do an analysis of just what economic price is worth paying, as a society, to try to contain/manage coronavirus.  The Chinese economy and society seems to have paid a fearsome price and yet to have successfully (for now anyway) kept the worst of the spread of the disease in Hubei province (for anyone doubting the logic, I found this thread from a China-focused researcher helpful).

Serious scholars suggest that if the virus were simply left unchecked, it might infect 40 to 70 per cent of the world’s population (say 50 per cent).  For all the uncertainty about the true death rate, assume for the sake of argument 1 per cent of those infected.  In New Zealand terms, that is a potential total of early deaths of 25000.

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, if we could reduce the number of those who got seriously ill (but didn’t die) as well, it would be fair to ascribe a value to that too, but if people are up and about again in a month –  or even two –  that number will be swamped by the costs of death, given that in many cases those getting the virus won’t themselves be that sick at all (bad colds seem to be “one of those things” in life).

This is mostly by way of leading up to the question of how large would be discretionary economic costs be.  Note that I emphasise the word discretionary.  What other countries do as a matter of policy, and what other individuals do as a matter of prudence/fear is largely outside our control.  Thus almost all –  the exception perhaps being around university students – the economic effects so far are outside our control, and so is the temporary collapse in the rest of our tourism industry currently getting underway.  We will pay –  in lost output –  those costs whatever New Zealand governments do.  If major cities in other countries shut down for weeks at a time, disrupting travel, supply chains, demand for commodities or whatever, we have no real control over that.   Annual GDP at present is around $300bn.  It isn’t hard to envisage a scenario, quite outside our control, in which GDP for this year as a whole is perhaps $10bn less than otherwise.  That is income/wealth that will never be made up, even if/when after the crisis we get back ont a pre-crisis path.

The big choices are likely to be around how early/aggressively our authorities choose to act in shutting down cities, discouraging (or banning) social gathering, restricting movement etc etc.  We don’t really have hard data for other places yet, but what we know of the Chinese data suggests that these costs too could be very substantial –  not only has much of China been closed for six weeks already, but they are a long way from being back to normal, and with no idea what sort of virus resurgence they would see if they tried.  Shutdown, possibly pre-emptively (if still possible), much of New Zealand at different times for, say, six weeks at time.  In doing so, you could easily cut GDP during those shutdowns by 50 per cent.  Even if things quickly got back to normal after that, you’d still be looking at, say, 5 per cent loss of GDP for the year as a whole.  5 per cent of GDP is $15 billion, lost and never coming back.

I’m not attempting to offer answers here.  There are so many imponderables, most especially about what difference the toughest sustainable measures can eventually make to the death toll.   But it would be good to think that some of those “brightest New Zealanders” Hamish Rutherford told us were beavering away on these issues have at least been trying to think about the options in a systematic cost-benefit sort of way (here I emphasise the past tense, since time would appear to be of the essence, and you would hope officials haven’t shared in their masters’ public-facing sunny optimism about the threats we face). But if they haven’t done it yet, they need to be doing so now, urgently.