A couple of weeks ago, Shane Wright e-mailed me telling me that he was doing a piece for next weekend (the 18th) about the recession we’re in, and how to get out of it. He was “talking to people who were at the economic policy coal face in the last recession. That means your name has popped up!”
He asked me to jot down “a few points about what the govt/RBA need to think about coming out of this recession. That can include anything you’d like to consider, including JobKeeper/JobSeeker”. You can see the result in his piece published today which, is mostly based off the phone conversation we had after I sent my e-mailed response.
In any event, for the record, here the the notes I sent back on receiving his first email – I’ve slightly edited them to improve readability.
A few quick thoughts and then happy to chat.
- Err on the side of doing too much not too little.
- We should run the stimulus as hard as we can without a significant tick-up in inflation. It’s not impossible that inflation picks up disappointingly soon because, unusually for a recession, the shock has not just been to demand, but also to supply. But an uptick in inflation is likely to have lower costs than an error on the other side – worse unemployment – lower output and the possibility of ‘scarring’ of more of the workforce than necessary though lengthy absence from the labour force.
- The RBA should probably print money. But I’d much rather see them doing that to monetise stimulus activity that goes directly into economic activity rather than propping up asset prices. It’s much more effective, it’s much more direct, it’s much more efficient and it’s much fairer.
- We should leave the magnitude of any money printing to independent agencies – in particular the RBA – in charge of how much that is. (That’s a problem because they’re very conventional in their thinking and not thinking this way at present.) To do it properly one would also want them to have some independent power to unwind some of that monetisation, but that would involve major institutional and political reform. That could come later if it were necessary in the unlikely event that the political system had the stomach for it.
- We should broaden our idea of what can and should be a stimulus. The last stimulus was delivered with our hard hats on. Partly because the government was nervous that fiscal stimulus looked undisciplined, we wanted to be reassured by the seriousness of the measures and other than the cash splashes, it was mostly buildings, light infrastructure and so on.
- But fixed investment is only about a quarter of investment in our economy – the rest being human capital. That should have been a much larger part of our stimulus last time round (there were some innovative expansions of university research infrastructure funding). Greater stimulus spending on investment in human capital is also much fairer in terms of gender balance. We should look for ways we can employ aids in teaching and health, do more research and intensify training to build the human capital in the economy.