The message from central bankers here and abroad on balancing the management of the pandemic versus the economy is now very different to that put forward by the Morrison government.
It suggests either that the latter have allowed partisanship and a desire to shift responsibility for the recession onto the Victoria government, or they don’t understand that the framing of lockdown versus the economy is deeply flawed.
For months now, the Reserve Bank has been explaining that lockdowns are not the only factor affecting the economy. The economy’s primary problem is a lack of demand, and uncertainty is a key contributor to that lack of demand. This is governor Philip Lowe right back in May:
One obvious source of uncertainty is the pace at which the various restrictions are eased. The faster that the restrictions can be lifted safely, the sooner and stronger the economic bounce-back will be and the less economic scarring will take place. But this is not the only source of uncertainty. Another source of uncertainty is the level of confidence that people have about their future, both in terms of their health and their own finances. It is interesting that the initial evidence is that countries that have had fewer restrictions are also experiencing very large contractions in economic activity. This suggests that voluntary decisions that people have made in response to the uncertainty about their health and their finances is also playing a major role.
Lowe, it turned out, perfectly anticipated the outcome in Sweden, where, infamously, the government avoided draconian lockdown measures, only for the economy to slump significantly more than Australia’s as Swedes in effect self-imposed lockdown measures in response to the virus.
It turns out that people make up their own minds about the risk of contacting a potentially lethal virus, regardless of what governments do.
Just to bolster the message, Lowe has repeated it since then. Lowe’s July meeting statement explained “uncertainty about the health situation and the future strength of the economy is making many households and businesses cautious, and this is affecting consumption and investment plans”.
In his August statement to a parliamentary committee he said “people’s attitudes to spending are changing because of the pandemic. It is probable that households and businesses will remain more cautious and that this will affect consumption and investment.”
What the Morrison government, and much of the business community and its shills like Jennifer Westacott, don’t get is that removing lockdown is not going to restore confidence: only when people are no longer concerned about the risk of dying, or infecting a loved one, will they lose their caution and start spending.
It’s also a lesson that Adam “lockdowns don’t work” Schwab doesn’t understand, possibly because, as head of a travel agency, his salary depends on his not getting it. What doesn’t work is not having lockdowns.
Lowe and the RBA aren’t alone on this. If anything, US Federal Reserve chairman Jerome Powell has been more forthright.
“The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus,” he said in June. “A full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities.”
Last week Powell repeated the message: “So the key thing for the economic recovery and also just in general is to get the spread of the disease well and truly under control. And that was always going to be very important in supporting, as rapid as possible, a reopening, a sustainable reopening of the economy.”
Note “sustainable”. Without the virus being under control, you can reopen the economy, but you’ll end up having to close it again, like we’ve seen in Victoria, like we saw in many southern US states.
The approach seemingly preferred by the federal government, which holds that NSW is the “gold standard” of pandemic management, is to let virus cases continue to tick over at a low level, leaving the possibility of contracting it as the background radiation of ordinary life.
Perhaps a year or two of such exposure will dull people to the idea, and they’ll eventually drift back to pre-COVID spending and working patterns.
It’s certainly a policy option, but a risky one, given the possibility of a major outbreak flaring up, and it entails many quarters of low demand and low investment. Spain, France, Britain are all now seeing a worrying end of summer surge in new infections. What’s that going to do for those economies heading into 2021?
It’s unlikely that Morrison and his colleagues are thinking that far ahead.
The pile-on on Daniel Andrews and his risk-averse, meandering road map out of lockdown looks more like a mixture of partisanship, justified fury at the incompetence of the Andrews government in allowing the outbreak to occur, and a desire to ensure voters know that the blame for what could be a third consecutive quarter of economic contraction belongs in Melbourne.
But pretending that a sustainable recovery is just a matter of rushing to reopen ignores the clear advice from central bankers that governments don’t control how consumers think, and that they’ll make their own decisions about spending, regardless of the views of politicians, business and commentators.