Analysis by Keith Rankin
Will there be a resumption of normality? For a few weeks now, awareness has been growing that the global economic consequences of the Covid19 epidemic (that WHO today notes has “characteristics of a pandemic”) may be greater than the medical consequences, even if the European death rates fail to level‑off, even if EU death rates repeat in the USA and UK.
Some economic consequences of Covid19 represent trends that were already underway. So normality, as most of us understand it, is probably not going to resume.
One of the more obvious economic consequences is the impact on the global travel industry. On this, my reading is that the travel industry already reached a turning point in 2019. This turning point was driven in part by concerns (especially but not only by young people) about the contribution of the travel industry to climate change through fossil fuel emissions. It was also driven by more general concerns about enforced consumerism; and the consequences of ongoing exponential accumulation of other waste products (such as plastics) and their impacts on the food chain. We may add other environmental concerns – deforestation, and water insecurity – that contribute to a changing pattern of economic demand in the world. Further, the shear scale of mass tourism was making the ‘product’ less attractive.
Indeed, increased inequality and income insecurity had already limited the growth potential of global tourism.
We also note that the global travel industry includes huge amounts of business travel, much of which is not strictly necessary, and is relatively easily cut from the budgets of stressed organisations. Structural change here was already underway, with, for example, academics increasingly able to collaborate and converse without attending formal conferences.
The global travel industry works today through economies of scale, and huge amounts of capital – eg in large aircraft and ships. Massive amounts of capital have already been sunk in fleets of airliners, cruise ships, container ships and oil tankers – and in the capacity to keep building these behemoths. An accelerated depreciation of all this fixed capital may not be easily reversed.
My argument here is that trend‑changes already underway may be substantially misattributed to an economic shock – an unknown unknown from a 2019 perspective, the Covid19 pandemic. This misattribution may encourage ongoing intellectual laziness. Why investigate further when we already have an explanation for the rapid‑onset decline of a major world industry?
Yes, there will be an economic recovery – indeed a substantial recovery. But the travel industry will probably not fully recover. It was already tainted. The decline will be hastened by Covid19, which I suspect will prove to be the world’s first middle‑class health pandemic.
Stagflation?
Covid19 is a virus. Another virus is the fear virus. This is the one that is self‑fulfilling. There nothing else quite like middle‑class fear. The global financial crisis of 2008 was a crisis of fear.
This crisis may be different, because global supply‑chains have been severed in ways that never happened in 2008. The recovery of these supply chains will be critical to a resumption of anything like normality, and should already be well underway. The crucial ingredient to this recovery is China (as it was to the post‑2008 recovery). We in New Zealand (and Australia) should get over our white middle class racism towards China – China is now a net importer of Covid19 – and urgently re-establish supply chains with that country.
Otherwise, the central macroeconomic consequence of Covid19 will be substantial reduction in supply elasticity. (In New Zealand we have already become familiar with this problem in the construction industry, where shortages of building resources proved more important than shortages of money.)
A supply‑elastic economy is one that can easily respond to both increases in aggregate demand and reorientation of economic demand in favour of some products at the expense of demand for others. A supply‑elastic economy is an economy that is not ‘maxed‑out’.
If policymakers address the present crisis as a conventional macroeconomic crisis – as a crisis of insufficient consumer and investment spending – then a contrived increase in aggregate demand may be met by an unresponsive aggregate supply. Result, ‘stagflation’, the bugbear of the late 1970s. In those years, supply was restricted on account of high interest rates (monetarist anti‑inflation policies), corporate rent‑seeking, high oil prices, and labour‑market rigidities.
This time, a simple inability for businesses to acquire necessary materials may underpin inelastic supply. This is likely to be exacerbated by rigidities in transferring human resources from white‑collar service employment (essentially the overpaid ‘bullshit’ sector described by David Graeber in his book ‘Bullshit Jobs’) into employment in sectors that contribute to our supply-chains.) Once again, we have pre‑existing constraints on aggregate supply combining with the new constraints arising from the Covid19 contagion.
This situation requires a more nuanced response than reliance on monetary policy easing, which (along with China) saved financial capitalism from the 2008 financial crisis.
The good news, this time, is that excess global transport capacity – arising from less tourist and business travel – may be converted increasingly into freight capacity. Already cheap airfares were possible to a large extent because passenger aircraft were also carrying freight.
There will be one new ongoing supply constraint to note. Increased absence from work, due to much higher enforcement of virus‑free workplaces, will lead to reduced economic capacity, especially in the winter months.
Nevertheless, my sense is that global supply chains can quickly revive, and that the 2020s will turn out to be a decade in which constrained consumer demand re‑establishes itself as the more intransigent problem.
National policy response? Universal payment.
What should be the New Zealand government’s economic response? It should be a response that facilitates a medium‑term transition to a form of capitalism that can adjust to structural constraints on both aggregate demand (ie a movement away from consumerism) and aggregate supply (ie less‑stressed and less‑vulnerable supply chains), while not necessarily promoting those constraints.
We need simple easily‑implemented economic solutions that do not depend on the restoration of economic growth. New Zealand, with its comparatively simple income tax scale, is able to make changes that fulfil this specification.
The suggested change is this. Every New Zealander over 18 could (say from 1 July 2020) be granted a weekly credit of $175. To offset this, all personal income would be taxed at 33 percent.
This is much less radical than it sounds. Consider six examples:
Persons earning more than $70,000 a year would notice no change in their present circumstances. But, if they lose their job, they will keep their weekly $175 unconditionally. They would only have to apply to Work and Income if they need support over and above this.
Persons earning $48,000 a year would gain $12.70 per week. And, if they lose their job, they will keep their weekly $175 unconditionally. They would only have to apply to Work and Income if they require support over and above this. Persons earning less than $48,000 would gain more than $12.70.
Beneficiaries (including Superannuitants) would notice no immediate change in their present circumstances. $175 of their benefits would be classed as inviolable, so would not be lost if they enter into to some form of employment or new relationship. (A simple variation of the policy could see high‑earning Superannuitants becoming upto $70 per week worse off.)
Working for Families tax credits are payable currently to the lower-earning parent in many families. Parents already receiving weekly Working for Families tax credits in excess of $175 would not gain more immediately. But they would secure their $175; they would still get at least $175 if a change of circumstances reduces their Working for Families entitlement.
Low income self‑employed people would gain as a result of this initiative. They would be assured of $175 every week, regardless of the vicissitudes of the marketplace.
Domestic tertiary students would be assured of $175 per week, regardless of parental income or part‑time jobs. (A public affordability option here would be to discontinue free tertiary fees, thereby using student loans more for fees and less for living costs.)
The universal payment would serve as a very efficient ‘automatic stabiliser’, allowing the domestic economy to keep ticking over during periods of market uncertainty. It also would mean that, in conditions of low discretionary demand (eg due to less‑consumerist spending choices), people will be assured of a basic universal income. They will be more easily able to choose to enjoy the benefits of past productivity gains by opting for less stressful and more sustainable lifestyles. Aggregate incomes necessarily fall when most people choose to work less and spend less. Universal payments make this conservationist option possible, though not necessary.
Universal payments, to work effectively, need to be indexed at least to prices. It would be better to index the universal payment to a measure such as gross domestic product per person, ensuring that the payment would reflect productivity growth. Also, the presence of such universal payments gives an easy stimulus option for future crises; governments may simply raise the universal payment (in addition to regular indexed increases) as an alternative to cutting taxes.
In Closing
Covid19 presents us with a unique set of economic challenges. Are we up for it? The biggest threat to successful policymaking is our own intellectual laziness. Governments will only do the right things if pressured to do so.
See Also: Economics: Keith Rankin on Universal Basic Income and Covid-19
