It’s fair to wonder what Treasury and the Treasurer have been doing for the past month or so that they still haven’t come up with a plan to start fighting the economic impact of COVID-19.
It’s a safe bet one of the things occupying their time has been dusting off a 2006 research paper titled “A primer on the macroeconomic effects of an influenza pandemic”.
One of the authors was Dr Steven Kennedy, now the Treasury secretary.
The econocrats also will have been cranking up Treasury’s electronic abacus to re-run and finetune estimates done for that paper with the Treasury macroeconomic model, TRYM.
As they did so, they would have to be hoping two things:
- That COVID-19 is contained and doesn’t spread widely in the community; and
- That TRYM was way too pessimistic.
The reason for that hope is the model forecasts a very severe recession if such a pandemic gets loose here, even if it kills (relatively) few people.
Fighting such a recession would require vastly more than the $10 billion stimulus package that Treasurer Josh Frydenberg is supposed to announce one of these days.
The 2006 paper was spotted by Grattan Institute economist Matt Cowgill while rummaging around for some light reading on pandemics (Albert Camus’ The Plague is weak on data).
Bloomberg Economics’ James McIntyre unearthed a Ross Gittins report on the paper that came to the conclusion: “So here’s the bottom line: A seriously frightening outbreak of bird flu could plunge us into a recession that was about half the size of the Great Depression.
“And while consumption and GDP would have recovered by the end of the second year, unemployment doesn’t start to fall until the third year. (If we were lucky.)”
The Treasury paper, written in the time of H5N1 avian flu, assumed an influenza pandemic that killed 0.2 per cent of the population – 40,000 people in 2006.
That is a lower mortality rate than the 0.65 per cent of the severe 1957 and 1968 flu seasons. (Who knew?)
There are some dated assumptions – tourism is a bigger employer and part of the economy now, which means the impact would be worse – and TRYM reaches some unlikely conclusions.
The authors themselves warn: “Given the uncertainty around the size and evolution of a pandemic, let alone how a pandemic would affect the economy, it is reasonable to question the usefulness of pandemic modelling exercises.
“Indeed, it would be foolhardy to focus on the numbers produced by economic modelling rather than on the thinking around how pandemics might affect the economy.”
But even with such caveats, the modelling is rather scary, suggesting such a pandemic would turn then-normal economic growth of 3.6 per cent into minus 5.7 in one year.
Consumption growth would go from +3.6 per cent to -8.6. Employment would plunge from +1.4 per cent to -16.3.
Rather than those bare numbers though, the important thing about the paper is what it suggests for appropriate government policy.
The authors found the effect on households’ confidence was one of the more important ways in which a pandemic damages the economy.
“Furthermore, confidence effects in combination with the short-term withdrawal of labour are likely to produce most of the short-term negative impact on the economy.”
The confidence question today is difficult because the public’s confidence in the government has fallen sharply since the election.
The second bit is all about stimulus to get people back to work quickly once the threat of infection eases.
Stating the obvious: “Businesses would also be greatly affected by a pandemic, particularly those involved in tourism and delivering services more generally.
“Policies that might be effective in negating the economic effects of a pandemic relate to short-term support to businesses most affected by the pandemic, perhaps through creative finance arrangements.
“This would enable viable businesses to adjust more rapidly once a pandemic passes.”
That seems to have been what the government has been primarily pointing to, but the stimulus rhetoric has been evolving from “modest” to “measured” to “substantial” as the gravity of the situation has slowly sunk in.
And that is in keeping with the paper’s final message: “Lastly, in the case of a large pandemic, monetary and fiscal policy responses that stimulate the economy will clearly be required.
“In addition to the fiscal measures that accompany the direct management of a pandemic, there is likely to be a need for expansionary fiscal policy to help stimulate demand and, most importantly, to restore consumer and business confidence.
“Of course, expansionary fiscal and monetary policies will only be effective if they are accompanied by a range of other policy measures that maintain financial stability and promote business continuity.”
Yes, folks, 14 years ago the Treasury secretary recommended the use of expansionary fiscal policy to fight the threat of a severe pandemic-induced recession, the sort of expansionary policy Scott Morrison and Josh Frydenberg have had to be dragged towards accepting – and even then apparently scrimping on.
Household support, not just business investment incentives and loans, will be required.
The broad fiscal stimulus Mr Morrison has decried would indeed be necessary.
As just about everyone except Mr Morrison has suggested, one of the ways to achieve that (and record an overdue reform anyway) would be to humanely increase the Newstart allowance – but that’s already been ruled out by the relevant minister, the same person who last year suggested unemployed people would just spend increased payments on drugs or at the pub.
Dr Kennedy also was forced to defer on the Newstart question during Senate estimates committee hearings.
No wonder his was a subdued performance.
The Treasury secretary is more attuned to the real-world costs of policy than most in Canberra – he was a nurse before becoming an economist.