Bill Mitchell-en The coronavirus crisis – a particular type of shock – Part 2
(http://bilbo.economicoutlook.net/blog/?p=44488)
Sarrera gisa
… in my blog post – The coronavirus crisis – a particular type of shock – Part 1 (March 10, 2020) – I discussed some of the considerations that governments need to take into account when dealing with the economic damage that will result from the coronavirus crisis. I did not consider the health issues because I am unqualified to assess those other than to take into consideration what the health professionals are now saying as they gain more knowledge of the particular disease.
In Part 2 today, I extend that discussion and outline some specific issues that bear on the size and design of any fiscal intervention.
(i) Politika plan koherente bat behar da
A coherent policy plan has to be announced
One of the problems of endemic uncertainty is that rumours abound and fear leads decision-makers to make very irrational choices.
In Australia, these days, we are witnessing unseemly spectacles of consumers engaging in physical fights in supermarket aisles over who will get a package of toilet paper.
The share-markets around the world are plunging.
OPEC is falling out with itself.
And there is still hardly any coherent policy interventions being announced other than the quarantines and blockades and closures.
Governments are elected to lead and in times of crisis should make clear statements of how that leadership will be executed.
In Australia, the current government has been in months of denial about the bushfire crisis (claiming it had nothing to do with climate shifts) and seems to be unable to give any surety that it knows how to deal with the coronavirus crisis.
The only thing they have really said is they will not consider increasing the unemployment benefit despite the fact that perhaps upwards of 300,000 workers are at immediate risk of losing their jobs as a result of the turmoil.
I will come back to that issue soon as it relates to the temporal characteristics of a stimulus package.
The other aspect of having a plan is to place the coronavirus in context.
It appears (and I am no health scientist) that the virus is not particularly severe for the vast majority of people.
The unseemly fights in supermarkets over toilet paper (or chicken as I am informed from Spain) are another version of the brain snap, share market sell offs in recent days.
The point is that economies run as much on sentiment as anything and panic will become a self-fulfilling movement if it is not stopped.
One of the roles for governments is to provide surety and ease pessimism.
So far, the federal government in Australia is failing in this regard. It should be saying we will do whatever it takes to stop a recession.
It should be saying it has as much fiscal capacity as is necessary to provide income and employment support and insulate the economy from the obvious demand impacts.
Instead, it is playing political games, trying to claim it will not behave as the Labor government did in 2008 (with a generalised stimulus) and will seek to protect its surplus targets while providing some (small) tax relief and investment allowances for business.
That won’t cut it.
(ii) Ekonomiaren errealitatea azaldu da
The reality of the gig economy1 is being exposed
This complex economic shock is also exposing the structural weaknesses of economies that have evolved under neoliberalism to be dependent on consumer debt and casualised, precarious work.
Many workers are now without the usual buffers that have helped people risk manage in times of job loss.
While some eulogise the ‘freedoms’ of the ‘gig economy’ and young people think of themselves more as entrepreneurs than as workers as they buzz around on motor scooters delivering food to those who can no longer be bothered interrupting their reality TV viewing to venture to the shops, the harsh reality of their insecure positions will be exposed by the coronavirus.
An increasing number of workers are now dependent on casual work hours as their main source of income.
These hours are the first call by firms seeking to adjust their costs as their sales fall.
Most of these workers are low-paid and have little saving. Once they lose their hours, rents become impossible to pay and the precariousness of their true positions in society become obvious.
They might think of themselves as entrepreneurs but they will require substantial income support from government to survive the hours losses.
It is also not just the workers that lose their jobs (hours of work) as a result of the spending collapse that will need support.
The government should introduce legislation to ensure that all workers, irrespective of their current status, have sick pay and other leave entitlements, so they are income protected from health failure during the crisis.
In the interim, while the private employers adjust to these new labour market rules, the government should pay all these entitlements in full.
The government should also change all health care rules relating to insurance etc to ensure that every worker and their family has first-class health care available for the duration of the crisis irrespective of their current state of medical insurance.
Further, the government should cover the wages for all workers forced into quarantine, who, otherwise would not be paid if they didn’t attend their workplace.
Their jobs should also be protected by law so that capricious employers are prevented from sacking workers who are unable to attend their casual work because of the illness.
And, looking beyond the crisis, governments would be wise to introduce regulations to reduce the overal size of the gig economy and to provide workers with greater opportunities to risk manage their own lives in times of crisis.
These sectors have only grown because governments have changed the legislative terrain in which they operate, which has shifted the balance of power towards employers.
Governments should force firms seeking to operate in these ‘markets’ to pay better wages and to provide secure work, holiday and sick pay etc.
For example, Uber drivers are currently working under regulations that are much less stringent to those faced by taxi drivers who have licences. The government should require those gig drivers meet the same occupational health and safety conditions.
A more secure labour market provides a better buffer against these sorts of external shocks.
It is time to reverse the vulnerability that neoliberalism has created – both in the short-term as a response to the current crisis, but, also, in the longer-term to reduce the exposure to future crises.
(iii) Zor lasaigarria
Debt relief
Italy has suspended all mortgage repayments while the country is caught up in the coronavirus crisis.
If accompanied by appropriate central bank liquidity guarantees so that the banks are not made insolvent as a consequence of the lack of cash flow then this sort of intervention is a sensible strategy.
Some people, at times like this, call for debt jubilees.
These are far more contentious, not because the currency-issuing government is unable to fund them (that is a given) but because there are equity considerations that should be carefully worked through.
A legislative program has to be legitimate in the eyes of the people.
I often read, in the context of calls in the US to scrap outstanding student debt obligations, the angst of those who have already paid off their debts, presumably through various levels of sacrifice (including for some, not much sacrifice at all).
Their concerns are legitimate. It would be fairer to scrap current obligations but also return in the form of a cash payment, the net present value of the past debt relinquished back over some reasonable time period.
That sort of equity measure is much harder to provide in the case of credit card debt.
In that case, the government should provide income support but not write the debt off.
(iv) Merkatuaren porrota
Share market crash
While the share markets are currently skittish – up and down – the fact remains that if there is a significant collapse in value then some superannuation/pension funds will be further compromised than they are currently with the extreme monetary settings that the neoliberal era has produced.
During the GFC, several superannuation funds were claiming they would have to review their contractual obligations (for defined benefit schemes, etc) if the share market losses continued.
Further, the so-called ‘market-based’ funds in Australia, which are just profit-sucking (via excessive management fees) ventures for the big four commercial banks, have been underperforming for years.
This would be a good time for the federal government to create a national superannuation scheme which it can always fund irrespective of the ups and downs of the share market.
I wrote about this in these blog posts (among others):
1. Time to nationalise superannuation in Australia – even conservatives think so! (October 23, 2017).
2. Eliminating the great superannuation rip off (March 16, 2010).
Clearly, as in the GFC, the currency-issuing government could also fund all the losses associated with share market gyrations if it chose.
But that would violate equity concerns.
The target for government action in this respect should be to ensure that all current superannuation entitlements are maintained and no balances are lost.
(v) Pizgarri bati buruzko ardurak
Considerations in designing a stimulus
It is clear that a substantial fiscal stimulus will be required to offset the obvious decline in non-government spending that is now evident.
But the size and timing of the stimulus depends on the context that it is being introduced into.
If, for example, the economy was at full capacity leading into the crisis, then the type of stimulus would be quite different to the intervention required if there was significant idle capacity already evident.
So to elaborate further, take the issue of unemployment benefits, which are highly contentious in the Australian political debate right now.
I have written about this issue on a number of occasions – see discussion and links in this blog post – ‘Progressive’ groups in Australia captured by neoliberal ideology (September 18, 2018).
Unemployment benefit payments have been increasingly below the standard poverty line in Australia and neither side of politics wants to alleviate that travesty.
They neither want to eliminate the unemployment via job creation programs nor improve the material circumstances of those that they force into unemployment via faulty policy settings (pursuit of surpluses etc).
In the current debate, the federal government has made it clear they will not include any relief for the unemployed in their upcoming coronavirus package.
The point is this:
1. If the income support payments were at a level that was deemed satisfactory (by health professionals, sociologists etc) and allowed a beneficiary to live a socially-inclusive life, then lifting the benefit should not be part of the stimulus package.
Why not?
Because lifting the benefit should not be a counter-stabilising measure that is reversed when the need for extra fiscal support is done.
2. But in the current situation, with the unemployment benefit way below the poverty line, the government should immediately increase the payments to reach a level consistent with a socially inclusive lifestyle, as part of the stimulus package.
It doesn’t matter that they are then permanently locked in to the higher level of payments.
Why?
Because starving the unemployed is one sign that the current deficit is too low anyway, quite apart from the short-term demands being placed on extra stimulus from the coronavirus.
The principle then is that a stimulus has to be calibrated in terms of where the economy is currently at.
We do not want a massive injection of government spending to be permanent if the economy is already performing well and needs temporary support while the dislocation and panic from the virus plays out.
But if the economy is already performing badly, then the stimulus has to divided into:
1. A component that targets a permanent increase in government spending.
2. A component that allows for a temporary increase that can deal with the negative effects of the coronavirus crisis but which can be withdrawn again once that crisis dissipates.
If a program is suitably designed according to those principles then the economy will avoid a recession and come out of the crisis closer to capacity than it currently is.
Given that, consider the shifts in the Australian aggregates between the peak of the last cycle and the trough:
1. In August 2008, the Employment-Population ratio was 62.9 per cent. By the time it reached its trough in November 2014, it had fallen to 60.5 per cent.
In terms of the January 2020 Working Age Population, that shift would amount to a loss of jobs of some 290.7 thousand jobs.
And, the January 2020 Employment-Population ratio of 62.6 per cent is still is below the pre-GFC peak.
2. The unemployment rate rose from 4.0 per cent in February 2008 to the peak of 5.9 per cent in June 2009 – a rise of 1.9 per cent.
That would amount to 260.7 extra workers unemployed if the same contraction occurred.
The unemployment rate is still 32.9 per cent above the pre-GFC low-point.
3. The broad labour underutilisation rate (unemployment plus underemployment) rose from 9.9 per cent in February 2008 to a peak of 13.5 per cent in May 2009, but as the then governments stimulus package started to work it to 12 per cent by August 2012.
Then as the government took fright, under pressure from the deficit terrorists, and started to cut net spending in 2012, the broad labour underutilisation rate started to rise again and is now at 13.9 per cent and rising further.
The following graph shows the history of this aggregate.
4. The recent GDP figures show the economy is slowing and operating well below trend output growth.
5. Wages growth remains at record lows and inflation is below the RBA’s lower-bound target range.
So we are starting this next cycle from a position a lot further from full employment than at the peak of the last cycle before the GGC.
Which means the stimulus package needs to contain initiatives that would have pushed the economy back to full capacity, which means these should be considered permanent increases in net government spending.
I assess the quantum to be around 2 per cent of GDP or around $A10,051 million sustained each quarter.
Investing in green transition public infrastructure would be an ideal way to create sector-specific demand which will deliver long-term benefits, help the ailing construction sector and tie up funds for several years.
The stimulus package also has to include a temporary injection of spending which could require anything from 1 to 3 per cent of GDP extra being sustained as long as the crisis is predicted to impact (tapered to approximate the trajectory of the disease impacts).
One recent estimate is that real GDP in Australia will fall by 8 per cent as a result of this crisis. If that was realistic then the fiscal stimulus will have to be more than 3 per cent of GDP, on top of the 2 per cent required to redress the existing slack.
Initiatives that would fall into this type of intervention would include one-off cash injections to low income groups as an example.
Given there is a supply dimension to this crisis, there is some danger that bottlenecks could be met in certain markets, as spending increased.
I assess that to be a relatively smaller concern. As I noted yesterday, I do not think the supply constraints will persist for very long, given the disease seems to have a life-cycle and workers will not be severely affected in large numbers.
Governments will try to minimise the spread, but once they realise they cannot fully contain the disease incidence, I expect it to become like a normal flu season – deadly for some people, inconvenient and temporarily uncomfortable for the rest.
(vi) Lan bermeko denbora
It is time to introduce a Job Guarantee
As in my suggestion that now is a good time for the government to reverse the damaging trends like the gig economy, it is also time for them to introduce a – Job Guarantee – at this point.
The unconditional job offer at a socially-inclusive minimum wage to anyone who cannot find work elsewhere is an essential safety net and countercyclical capacity that every monetary economy should have.
The introduction now would go a long way to insulating casual workers from the damage that the loss of hours will bring.
It would also promote dynamic efficiency forces within the non-government sector to invest in more productive technologies so that they can maintain a business as the government increases the regulative demands on them – to ensure better work conditions, sick and holiday pay requirements, treating all workers as employees rather than independent contractors, and more.
It would guarantee income security for the workers who will be most vulnerable to the damage caused by the coronavirus and have long-term efficiency gains.
The shift from income support payments to Job Guarantee wages for those workers capable of working would not involve a stimulus of the size required. So this initiative would be part of the overall stimulus required.
And, the government could be assured that if it protects the economy from recession and reduces some of the slack its obsession with surpluses has already created, then the Job Guarantee pool at the end of the crisis would be fairly small (ideally around 2 per cent of the labour force).
But with the labour underutilisation rate of 13.9 per cent of the labour force and participation rates below their potential peak, there is a long way to go before we reach that desirable state.
Ondorioak
(1) I don’t hold out any confidence that the government will act to even protect the economy from recession.
(2) They are too busy trying to wedge the Opposition to come up with a stimulus package that is of a sufficient size and design and has equity considerations at the forefront.
(3) But it is clear they have the capacity, just as all currency-issuing governments have the capacity, to avoid this crisis.
(4) Wheter they use that capacity is another matter.
1 The gig economy refers to temporary jobs.
