The Economic Crisis Is Still To Come

Written by:
7 August 2020
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It is pretty clear what Victorian Premier Daniel Andrews wants: the overwhelming majority of Victorians to remain in their homes for, at least, 23 hours a day. Go out for exercise, and shopping, if you must. Don’t go out between 8pm and 5am at all. If you don’t know, the answer is “no”. Stay at home is the very clear message.

Business is shell-shocked. The problem being that everyone who can work from home, is working from home. Those who can’t have mostly been stood down. Nationwide the federal government estimates “effective unemployment” to be about 11 per cent. When JobKeeper goes many of those people will never work again. Many businesses will not reopen.

Yet the Victorian government wants still less economic activity.

The economy is already broken. Devastated. The economic crisis is still to come. Realise this: in 2008-09 the government spent tens of billions of dollars keeping the economy going. In 2020 the government has already spent hundreds of billions of dollars to stall the economy. We haven’t begun restarting the economy.

Victorians are panic buying. Again. Who can blame them when the Premier keeps saying you’ll be able to buy what you “need” – whatever that means – not necessarily what you “want”. He is trying to be reassuring; but everyone knows that government has a poor track record in providing what people need, let alone what they want. The Victorian government is trying to micromanage supply chains and distribution. This is not going to end well. It never does.

It gets worse. Both state and federal government are in denial. They seem to think that this is a “business-as-usual” crisis. That somehow when they give the all-clear that we’ll emerge – as if from hibernation – from our homes, squeeze into our work clothes, give up our day-drinking, and go back to work. This is the snap-back view. Similarly many economic commentators seem to think that a good dose of government spending and tax increases will restore our prosperity.

Well, no. Reflect on the fact that the federal budget never recovered from the global financial crisis. At best, the federal government was going to deliver a $5 billion surplus in 2019-20. That forecast surplus is now a $85.8 billion deficit. This financial year – before the second Victorian lockdown – the federal deficit is forecast to be $184.5 billion.

Economies are not about businesses, and unions, and shops, and goods and services. The economy is about people; their plans, their expectations, their relationships. For all the talk about competition, the economy is about co-operation. The economy is not a machine that can be switched off and on at will. The interrelated web of co-operative relationships that was the February 2020 economy is gone forever. The economy that now exists is a lot smaller than what it was just six months ago. The problem now being that we can’t be sure which part of it will revive and which part of it won’t.

What we can be sure of is that monetary and fiscal policy will play a small role in recovery – perhaps no role. The RBA has been trying to ignite “animal spirits” with low interest rates for a decade. The government has already borrowed so much money that our grandchildren will be paying it off. Not that I’m being overly critical – that spending was necessary to maintain the fabric of our society. The point being that we have already spent a lot of money just to stall the economy.

I do not want to suggest that debt and deficit don’t matter – that somehow the RBA could just print money to finance our spending. Modern Monetary Theory is to economics what hydroxychloroquine is to COVID treatment.

Warren Hogan of University of Technology Sydney has suggested that two decades of sustained economic growth will be necessary to pay off the debt. I agree.

We are going to have to work our way back to prosperity. Job creation is going to have to be the number-one policy objective for the next generation. Not make-work job creation that government excels at, but rather private sector jobs. Not more road building projects, but rather private sector entrepreneurship and innovation. That means trade and open borders. There is going to be a lot more technology use, too.

Serious microeconomic reform is needed. Australia has done it before. We could have been a banana republic.

There is no excuse why Australia cannot be a wealthy and prosperous nation. Healthy, kind and caring too.

We have also become used to the trappings of prosperity. We are going to have to give up some luxuries. Like the massive regulatory state that has evolved over the past generation. We can no longer afford to have government agencies suing companies on a whim. Or have competition authorities making the world safe for incumbents. To be fair, government has already undertaken some deregulation and instituted some tax cuts, even repaid taxes.

That is a good start. Going forward cutting more taxes, cutting red tape, green tape, and beige tape will be a priority. Getting people into jobs and keeping them in jobs will secure our prosperity.

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