Targetting and the stimulus: who should pay the rent?

I ran into Ken Henry at a function – I think it was the terrific PM’s Science Prizes in late 2008 but someone may be able to look things up and falsify this claim. In any event, I squatted at his table and had a quick chat to him about the recently announced or soon to be announced stimulus. He said that, he’d been saying to his colleagues and to cabinet, his plan was to “go early, go hard, go households”. I said “can I quote you on that” and he had a think and said something like “Yes, why not?” So I did and it caught on.

Economics is a simple discipline with just a few basic ideas in it. One is targeting.

Here the idea was to get action as quickly and efficiently as possible over as broad a base as possible. It was very successful, particularly when you consider that you’re always compromising – you have to operate through instruments like taxes, subsidies, rates of payments and so on which set off various incentive incompatibilities which then create loopholes through which people will enrich themselves without contributing to the aims of the program. You might give money to some party and they just stick it in the bank – so you’re trying to take all that into account. Then there are the political constraints.

When I saw the Victorian Government’s cutting of payroll tax yesterday I tentatively tweeted that it was poorly targeted. I’m now less tentative. It’s lazy, if very typical, policy. It’s mostly token policy so the government can be seen to be doing something. You’d think at a time like this we could use the crisis to do a little better. The problem with the measure is that it’s so badly targeted. Where the point of the first 2008 stimulus was to get money out to households in a broad-based way, it was still targetted in that most of the payments were to people with high propensities to spend.

I tweeted yesterday that I’d have used the money to pay much more – a multiple of the payroll tax relief targeted to businesses in distressed sectors that employed a lot of people. One might have announced emergency measures and a review to be done in a few weeks so that this time next month the assistance might come with some behavioural qualifications as well – so that, for instance, it was only available on performance of some preconditions associated with continuing to pay employees.

And there are other sectors to think of to spread the risk around. And this is likely to draw in more resources than state governments can do using their taxing and spending powers given how narrow their taxing base is. For businesses in distressed sectors, there should be a short term entitlement for businesses to capitalise interest, and some attention paid to interest rate relief more generally, but I’d announce some short term inquiries into this to work out what’s the best we can do and still not imperil the stability of the banking system as a whole.

Rent is different. The ownership of property is an equity-like investment, and so I’d announce that in distressed sectors there would be rent holidays (I’m not sure whether they should be 100% or less than that) for some months to be determined on a monthly basis. Am I really suggesting that we should, in effect confiscate rental payments for SMEs in distressed sectors? Yes I am. Someone has to wear the risk of this emergency and so this should be prosecuted, as the clichémeisers are insisting, as we would a war.

We should have a government fund to assist anyone who’s relying on rental payments to meet their basic living expenses to get relief as will be the case with some self-funded retirees. But the bulk of landlords are in a better position to wear these extraordinary developments than their tenants. In normal times risk should be allocated according to the contractual terms to which people have agreed.1 But these are not normal times. Indeed, it is precisely by forcing risk to be borne more widely that we can maximise our economy’s flexibility to this crisis and see it bounce back from what looks like a savage downturn. Had the countries at the epicentre of the GFC adopted a similar course then, they’d have recovered much more strongly from the GFC.

  1.  In the light of my comments about rentiers being in a better position to bear the risk than rent payers, allowing markets and contracts to allocate risk in normal times will rarely be optimal in some absolute sense. But that’s just theoretical in normal times. Because there’s no incentive-compatible way to regulate this inefficiency away. If rentiers are required to bear risks they don’t want to, they’ll take their money elsewhere.
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12 Responses to Targetting and the stimulus: who should pay the rent?

  1. I am and will always be Not Trampis says:

    I would be loathe to call it a stimulus as these are not normal circumstances. Governments can spend money but supply chain problems make businesses hard to respond.

    I prefer to call it survival.

    • Moz in Oz says:

      Yes. Both because we are at the literal end of “there is no economy without society”, and because economic stimulus isn’t what we want now. “go out and spend” is not the message that should be conveyed.

      The focus really should be on “how do we help people survive”, “can we economically damage as few people as possible”, and a good dose of “try to reduce inequality rather than increase it” (there’s a whole lot of “let the poor suffer, they’re used to it” going on right now). “stay at home”… with 8 people in a three bedroom rented house when you have no savings and are scraping together money to buy food one day at a time. Then we blame those people for “breaking quarantine”. FFS.

      That’s where the blunt kiwi “increase all benefits” approach works, and the US “cash. Cash for all” also works. Even though I will almost certainly miss out, again, I find it hard to object to that… I’m likely to keep my job through this crisis, and I’m working from home on my normal salary. I’m not someone who will be homeless without a $1000 cheque from benefactors unknown.

  2. desipis says:

    “Indeed, it is precisely by forcing risk to be borne more widely that we can maximise our economy’s flexibility”

    Interesting I have been thinking about similar policy but with a different underlying strategy.

    1) Rent holiday for any business that is shutdown
    2) Mortgage holiday for any landowners directly shutdown or with rent income affected by 1
    3) Government guarantees banks and provides however much cheep money is required to keep them liquid.

    Alternatively:
    1) Outlaw redundancies or reduction in hours and pay for casual workers.
    2) Mandate by law that the banks have to provide interests free loans each month to businesses to cover revenue shortfalls relative to a seasonally adjusted previous 3 month.
    3) Government guarantees banks’ solvency and provides however much cheep money is required to keep them liquid.

    The underlying philosophy is to concentrate the risk in the financial sector where there are a small number of organisations that the government can directly and efficiently deal with through existing systems. Push the administration burden to existing private organisations that are adept at pushing money around. The financial sector shareholders may have to take a haircut, but at least the rest of the economy could be stabilised.

    • Perhaps there also should be a degree of relief re overdue council rates ; don’t know if this is widespread practice but our local government starts charging daily compounding interest from the first day you’re overdue .
      I was once about two weeks late paying and was startled to realise that I was already up for about $60 in interest charges on top of the overdue rates .

      • Moz in Oz says:

        Harsh! My council rang me when I missed a payment, to confirm that I knew I’d missed it (and gave me seven extra days to pay without penalty).

        I think that falls under “push the administration burden to existing private organisations that are adept at pushing money around”, and might at worst need enabling legislation.

        • Our local council does have some provisions for ‘hardship’ however the process looks lumbering.
          The council is itself already under stress ; the fires mean that lots of farms , which make up much of the rates base in the eastern half of the region are already on ‘relief’, their road graders worked almost nonstop for nearly 8 weeks on fire breaks – some ended up with broken axles etc expensive stuff. And to top it off earlier last year they spent a motza on a heap of infrastructure ‘improvements’ .

  3. I am and will always be Not Trampis says:

    I think we are headed for a depression ( a fall in output of 10% or more) and I think supply chain problems will mean no large rise once it ‘over’

    • Nicholas Gruen says:

      Yep, quite likely

      • Robert Banks says:

        Doesn’t that depend on what proportion of goods and services moving in national and international supply chains are “essentials” (or semi-essentials) as opposed to “discretionary” or even frivolous?
        Even if we all learn to waste less food, I expect that countries like China and India are going to resume sucking a lot of food from wherever, as fast as they can.

  4. Bruce Bradbury says:

    Like desipis I think that this would need to be linked to landlord’s interest payments. It should also be extended to households. Defining the events that trigger it would be difficult but not impossible.

  5. Marcus wigan says:

    We have a range of urgent issues and the most crucial at this point is getting funds to people thrown out of work or forced to put their businesses into receivership due to directors fiduciary duty not to trade in insolvency. While an immediate universal basic income can be deployed virtually instantly via ATO tax records but while this would overcome much of the Centrelink ferally blocking and delaying procedures I have seen no discussion of any protection for directors if they try to hold out. This needs done thought and discussion. Nick?

  6. Nicholas Gruen says:

    Thanks Marcus,

    I agree that directors’ duties need to be addressed.

    I saw something on that from government recently, so I think it was one of the early measures, if not dealt with, then raised officially. But I can’t recall where I’m afraid.

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