- We don’t know what the ripple effects will be but we can guess how the post-COVID economy will be different.
- Active fiscal policy from governments is back on the agenda.
- We’re likely to see a rethink of the welfare safety net and a massive increase in remote working.
The teddy bears in the window look out on a quiet street. The school on the corner is shut. The local fruit and veg shop has just closed – the health risks to the staff were too high. Outside my home office, it’s raining. It’s day 22 of the New Zealand lockdown.
There’s still a lot, medically and economically, to unfold. In particular, we don’t know what the ripple effects are going to be. We know (roughly) the upfront scale of the initial hit, but we’re none too clear on the second-round impacts, as one loss of business income turns into less spending at other businesses as well. And we don’t know what damage may prove irreversible. But already we can hazard a good guess at some of the things that will make the post-COVID economy different.
The return of active fiscal policy
Most obviously, active fiscal policy and its government spending is back, and not a moment too soon. We spent far too long on a one-eyed search for a budget surplus, ignoring the role of fiscal policy in actively managing the economic cycle. It’s become blindingly obvious that when faced with a COVID lockdown impact of something like 25-30% of GDP, only fiscal policy, deployed lavishly, is going to get you out of the hole.
And people have discovered – contrary to the previous ‘wisdom’ that it would kick in too late to matter – that you can deploy fiscal policy in a hurry if needs must. Apply in the morning for New Zealand’s Wage Subsidy Scheme – the Kiwi equivalent of Australia’s JobKeeper – and you’ll get an email in the afternoon saying the money is on its way. It’ll be in your bank account same day or next.
There will still be a role for the slower-to-roll programs such as infrastructure, and it’s likely governments will be more prepared with ‘shovel ready’ investment plans when the next crisis comes around, but we’ve also proved we can get a quick bang for the fast fiscal buck.
Budgets are going to be more cycle-sensitive in future, hopefully without reverting to the bad old days of lolly scrambles in election years. Aiming for a surplus won’t disappear: you need to run down the debt you incur in downturns. Indeed, it’s that surplus-in-good-times prudence that meant Australia and New Zealand could spend up large when needed. But the surplus won’t be the be-all and end-all it was.
“It’s that surplus-in-good-times prudence that meant Australia and New Zealand could spend up large when needed. But the surplus won’t be the be-all and end-all it was.”
Active fiscal policy will, finally, take the heat off monetary policy, to the relief of Reserve Bank governors. Monetary policy used to be the only cyclical lever to pull, and it got used vigorously by default. While fiscal policy sat on its hands, interest rates approached zero.
It was not sensible, and the critics who said, “interest rates are already so low that central banks won’t have enough ammo to fight the next recession” were largely right. Post-COVID, we’re likely to see better coordination between treasurers and governors.
Rethinking the welfare safety net
We’re also likely to see a wholesale rethink of the welfare safety net. It was one thing when only society’s unfortunates called on it: when it’s all of us, we are belatedly realising that we need something better, wider and fairer than the expensive, partial, complex targeted systems we ran before.
It does us no great credit as a society that we hadn’t twigged about welfare until our own skin was in the game, but in any event we’ve got there. There have been many recent calls for the likes of a Universal Basic Income, taking downside risks out for everyone in a value-free way. If the costings work, bring it on.
We’ll finally get into the 21st century with our statistics. Josh Frydenberg and Grant Robertson found a moribund patient on the operating table, but the heart monitor was showing yesterday’s pulse, other monitors weren’t working properly, and some bodily functions weren’t being monitored at all. The data – especially today’s ‘big data’ – was always there to provide faster and better signals, and my guess is that some very frustrated treasurers will now write the cheque for them.
The triumph of e-business
That’s in the policy space. In business, we’re going to find that anything that was e-challenged before, is e-endangered or e-critical now. It’s been the perfect storm for non-e incumbents: people have turned to Amazon, Zoom, Netflix, online media and the companies that deliver a week’s supply of meals to their homes. Non-e incumbents’ revenues – customer spend, advertising, subscription income – have shrivelled.
Beyond the cyclical impact of the COVID recession, there’s a lot more pain in store for ‘old’ sectors. Everything from professional sports to higher education is up for disruption. I just spent three days lecturing on economic regulation over Zoom. Was it exactly the same as the physical lecture room interactions? No. Serviceable enough? Absolutely. And that raises the question, how will traditional teaching and its cost structures fare when even more ‘massive open online courses’ appear?
Then there’s fibre, and how it’s underpinned so much of our ability to operate through the lockdown. Sceptics about Australia’s National Broadband Network or New Zealand’s Ultra-Fast Broadband Initiative may have scoffed at the ‘build it and they will come’ idealists. Who’s laughing now?
How companies are managed isn’t going to survive new challenges, either. Many companies are going to find that they do not need, and staff won’t want, the close managerial supervision that they operated pre-COVID. Why go back to command and control when many self-directed employees will have shown they can work perfectly well remotely?
Businesses are social creatures, and the physical commute to the 9-to-5 office and its processes isn’t dead, but it’s ailing. My guess is that we’ll look back at pre-COVID management practices like we look back at photos of 1950s typing pools.
“My guess is that we’ll look back at pre-COVID management practices like we look back at photos of 1950s typing pools.”
Maybe, post-COVID, we won’t change that much. People tend to do Dry July but go back on the beer in August. But this time looks different.
On everything from disaster readiness, the role of experts in policy, expectations of politicians and the scope of the modern state, through to diversification of supply chains, public sector pay relativity, the shape of the workplace, and an e-enabled society and economy, the status quo is in for a hard time.
Low starting level debt means AU and NZ are well placed to afford strong anti-COVID fiscal policy
Economists weigh in on what COVID-19 is likely to change
With COVID-19 leaving a spate of problems in its wake, economists give their take on what the pandemic is likely to change.Read what the economists say