Let’s not waste another crisis

How do you do a graphic for a post-COVID world?
Well I guess you have an office with everyone running around with Groucho glasses facemasks on.

The Mandarin asked me to pontificate about the budget – along with some other ‘brains trusters’. I got a bit carried away with myself and wrote an op ed length piece. It’s not really about the budget as it’s likely to be, but about some larger questions about what fiscal policy should look like in a post-COVID world.

I was very impressed with the Government’s early handling of the economics of the COVID crisis right down to the Prime Minister explaining that, consistently with the nation’s unique welfare system, governments owe the same level of emergency financial support to every Australian, and not, as was common in other countries, some payment in proportion to their existing income.

It’s not always the case of course, but it is more often than we appreciate that the generous course is also the most prudent. That’s particularly true when economies are struggling. It was true of the Marshall Plan in the late 1940s which involved the US effectively gifting its recently defeated enemy, Germany around 2% of the US GDP. If the West had done the same with Russia after the fall of the Berlin Wall, how much healthier, happier and safer might our world be today?

The risk now is that governments turn towards austerity before we return to full employment. This happened with a vengeance in the northern hemisphere after the GFC with disastrous consequences both economic and political.

But it also happened here. The RBA consistently dragged the chain on returning vigorously to full employment even to the point of missing its inflation targets. And in that context, moving to balance the budget did more harm than good, helping to keep hundreds of thousands more Australians unemployed and underemployed than would have occurred otherwise.

We should learn our lesson and this time macro policy should err on the side of doing too much, not too little. In fact, in the spirit of not wasting a crisis we could initiate some really big reforms. Each would have their opponents, but each would be much easier than tax reform or tariff reform was.

Ross Garnaut and others have scoped out two bold reforms that combine long-term economic gains with large fiscal costs upfront. And that’s exactly what is needed in our circumstances.

The first involves transitioning to corporate cash flow taxation from the current loophole laden system. This gives business a cash flow boost up front but makes it much harder for the Amazons and Googles of the world to shift profits offshore, so it would generate more revenue over time.

The second implements Milton Friedman’s ideas for a universal basic income for all instead of the dole for some with the abolition of tax-free thresholds and other complexities of our welfare and tax systems. This costs the budget more while unemployment is high, but brings in more revenue closer to full employment. So not only is it well suited for our current circumstances, it leaves us with stronger automatic stabilisers. So they’ll be working more strongly against the next downturn when it inevitably occurs. It would also leave behind the shameful politics of humiliating those doing worst in our society. To invoke a cliché, rather than harass them, it gives them a go.

We can also improve the budget mightily by breaking the private banks’ monopoly on money creation. I’ve previously proposed everyone having an account at the RBA on competitive neutrality grounds. If Westpac is favoured with such an account why, in the age of the internet can’t we all have a suitably basic one for transactions and, I’ve argued super-collateralised loans (of up to 60 per cent of the value of our homes)? This too would intensify the automatic stabilisers in the system, increasing budget revenue by tens of billions of dollars as interest rates rose with recovery as well as improving the security and efficiency of our payments system.

Researchers at the Bank of England have suggested something with similar effects – the introduction of central bank digital currency – probably using distributed ledger technology. They argue it could expand GDP by a whopping three per cent. It would reduce transaction costs by creating a new, more efficient payments system, and generate a large fiscal dividend for government via seigniorage and lower borrowing costs.

For the precise measures of the stimulus, I’d mostly be throwing away the hard hats and ‘high vis’ jackets. Where it’s not already ‘shovel ready’, heavy infrastructure investment takes many years to get going.

We should:

      • Continue protecting jobs that might otherwise disappear. If we don’t, it will slow recovery as demand returns in tourism, the arts and tertiary education (there were some innovative expansions of university research infrastructure funding in the last stimulus).
      • Launch a big social housing building program – which would generate more jobs per dollar in outlays than building private houses.
      • Further, expand funding to green innovation and investment.
      • Generate new jobs particularly where they help build human capital and employ people with low skills while supporting them to improve them. A three-year federal teachers aid scheme would tick both boxes, while a nurses aid scheme in aged care ticks one and a half if we could develop training to allow aids to build their skills towards better jobs in the future. But there’s plenty more one could do.

But, as we watch on horrified by the rate at which our democratic world is falling apart, we should understand that there are times in history when generosity is its own reward. We reap what we sow.

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18 Responses to Let’s not waste another crisis

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

    You forget Nick that We went to austerity too soon. The last budget Swan had full control over took 0.9 % points off GDP ( which was easily the tightest budget recorded in history) and the economy naturally slowed.
    Central Banks can reduce inflation pretty easily but find the opposite very hard, very very hard.

    you need people with vision to take advantage of a crisis. the last person like that was Keating. his vision was not always right however.

    your suggestions are ,as usual, eminently sensible.
    I see no-one on either side who has vision at all.

  2. hc says:

    You were asked to “pontificate”? I am almost sure not.

    Definition:

    verb:

    express one’s opinions in a pompous and dogmatic way.
    “he was pontificating about art and history”

  3. Nicholas it sounds reasonable, politically not sure.
    Re shovel ready there are a shirtload of regional bridges and roads that really have been shovel ready for yonks, just never enough money . Each one might only be a few mill but there’s awful lot of them.

  4. paul frijters says:

    social housing building program: absolutely.

    Three-year programs for teachers and nurses: interesting. I didn’t know Australia had a shortage of them.

    The green subsidy stuff: I fear that would go the same way as many previously green subsidies or other industry subsidies. The bulk ends up in the wrong hands resulting in the opposite of what the headline promises. Given the present political realities of what type of networks are in charge, such subsidies seem a bad idea to me.

    Protecting jobs you think will return needs a clear plan for the lifting of the restrictions that make those jobs nonviable. And I suspect one needs to do so quickly otherwise one is not protecting jobs but creating zombie jobs.

    • Paul we’ve been importing nurses and GPs for years. My understanding is it’s complicated but in part involves getting people willing able to work in areas that are unattractive for example aged care and regional areas .

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

    Nick,

    your subsidy thingy.

    How about introduce carbon price ( because of negative externalities) and attempt the Garnaut plan of becoming a renewable energy exporter.

    • Nicholas Gruen says:

      My “subsidy thingy”

      That’s very helpfully Homer

      Your commenty thingy didn’t help my thinking thingy understand what you were talking about.

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

    What is hard to understand

    A carbon price does wonders for green investment and innovation.
    you then ditch any subsidies

    The Garnaut plan has us producing so much low cost electricity we export it.

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

    Nick, on related issues.
    given what the government has done do you think they will fess up and say their criticisms of the successful ALP policy toward the GFC was wrong.
    Afterall it is impossible to say it was wrong then but right now.

    I get the horrible feeling all the government might do are tax cuts which as Reagan showed increase the structural deficit big time but not lot on the economy if it is targeted at high income earners

    • Nicholas Gruen says:

      I expect #ScoMo will admit that he was wrong to criticise the Rudd and Gillard Governments for not running a surplus and Rudd, Gillard, Shorten and Albo will all join him in a photo op saying in all the circumstances he’s doing a terrific job.

      Tony Abbott will use one of his trips to Home to recommend Rudd, Gillard, Shorten and Albo for knighthoods. They’ll all have a reunion at Buckingham Palace when they turn up for investiture (just in time for Sir Prince Phillip’s funeral.)

      The WHO will announce that the world is now rid of COVID 19

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

    your name is not Gruen it is Nostrodamus

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

    I see from 7.330 last night the only responsible stimulus is a Liberal stimulus and an ALP stimulus is always bad even if it works.
    Silly me.

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