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Covid 19 has hit the economy hard; But where is the Recovery going to come from?

COVID-19 has hit the Australian economy hard. By some estimates the Australian economy will shrink by approximately 7 per cent in 2020. Maybe more. That’s a virtually unprecedented recession.

Shutting down workplaces: hospitality and tourism, higher education and some manufacturing: comes at an enormous cost.

We can’t put a price on peoples’ lives and peoples’ health. But many people will need to sacrifice to ‘spread the burden’ of funding recovery.

Some have suggested a ‘HECS-style loan’ for those unemployed as a consequence of this crisis.

Because this discriminates, it is unfair. Richard Denniss – speaking on ABC radio – is correct about this. Though I think he is wrong about HECS more broadly. Income contingent loans to pay for government support of individuals during the crisis would mean a veritable ‘labour market lottery’ as to who was left with debt. Denniss agrees with this much. But also ‘income contingent loans’ have a longer history of losing their progressivity as governments reduce thresholds to help pay for other endeavours – such as ubiquitous corporate welfare.

Also, will the government temporarily increase corporate tax during the recovery period to service debts incurred supporting the private sector during the crisis?

The government’s stimulus has provided a lifeline for many.

But one rational assumption is that the economy won’t simply ‘snap back’ at the end of a six month period; and as a consequence the government cannot afford to ‘step back’ and just let the private sector ‘fill the breach.’ The real economy doesn’t work like this.

Richard Denniss of The Australia Institute thinks the Economy will not simply ‘snap back’ after the COVID-19 Crisis. A long term government role is required (Image from thenewdaily.com.au)

In hospitality and tourism, the structural effects on the economy could last quite some time. We don’t know whether there will be a ‘second wave’ or whether we will ‘break the back’ of the spread in this country. But global travel will take years to ‘get back to normal’, and the US and the UK are still deep in crisis. The ACT and Northern Territory also understandably want to reap the benefits of wiping out the virus, and don’t want it reintroduced from interstate.

On the other hand, the crisis provides an opportunity to broaden and deepen the public sector to create the ‘economic infrastructure’ around which recovery will occur. Make strategic infrastructure investments, as well as structural improvements in public services; unemployment services; in Health, Aged care and disability services; in welfare, transport, communications, arts. The NDIS needs to be more accessible, with ‘consumers’ interests protected more vigorously. The CES (or ‘Centrelink’ these days) should be refunded as a ‘one stop shop’ for job-seekers – but without the usual harassment and humiliation. Homelessness could be addressed ‘head on’ with a big investment in public housing. Fix the NBN with ‘fibre-to-the-home.’ A big public investment in renewables. And coming out of the crisis: Have an active industry policy which strategically supports and invests in high wage manufacturing.

This is also an ideal opportunity to progressively reform welfare across the board; and lift job-seekers out of poverty.

On ABC radio high speed rail was inferred as perhaps a ‘dubious investment.’ But it could drive growth in the regions, with a flow on of jobs and affordable housing. As well as containment of urban sprawl and the transport crises that ensue from that.

The simple truth is that the public sector might have to pick up the slack on the economy for some time to come if there is to be any chance of a recovery. And if we navigate this in the right way it can present an opportunity.

Modern Monetary Theory (MMT) holds that as the issuer of the currency the government can create money at will to invest and ensure a ‘full employment guarantee.’ Though this is limited by real economic constraints concerning the scale and nature of goods and services actually produced in the economy at the end of the day. In some instances there might also be inflation; and you cannot ‘create money’ to fund an infinite influx of imports.

But full employment is in everyone’s interests: so long as there is an ‘efficiency dividend’ which provides benefits for all; and so long as consultation with unions ensures there is no endless ‘wage-price spiral.’ Higher employment has a ‘multiplier effect’ on the broader economy that also makes debts easier to service. At the same time, the wage share of the economy has been falling for decades; and long term there is a need for a structural correction which could also create extra demand in the economy.

As part of this picture there should be reform of the labour market improving compensation in low-paid jobs – either with regulation, or through the social wage (or both). Modern Monetary Theory has been somewhat skeptical of the role of taxation, claiming it ‘takes money out of the economy.’ But this need not be the case if all that money is spent; if indeed there is a stimulus. Taxation also allows for a much more finely targeted redistribution of wealth: which should be desirable for progressives.

As MMT theorists also recognise, state governments in Australia cannot issue currency.

The current public health crisis is going to cause much more pain before it is overcome. But the right kind of policies on investment, industry policy, welfare and stimulus can minimise that pain, and even help ensure in the end we come out of the crisis stronger.

This article was originally published on the ALP Socialist Left Forum.

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13 comments

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  1. leefe

    “…strategic infrastructure investments, as well as structural improvements in public services; unemployment services; in Health, Aged care and disability services; in welfare, transport, communications, arts. The NDIS needs to be more accessible, with ‘consumers’ interests protected more vigorously. The CES (or ‘Centrelink’ these days) should be refunded as a ‘one stop shop’ for job-seekers – but without the usual harassment and humiliation. Homelessness could be addressed ‘head on’ with a big investment in public housing. Fix the NBN with ‘fibre-to-the-home.’ A big public investment in renewables. And coming out of the crisis: Have an active industry policy which strategically supports and invests in high wage manufacturing.”

    From this misgovernment? hysterical laughter
    Oh, wait, you”re serious. longer louder more hysterical laughter

    That was painful.

    Yes, it’s what should be done. And that is why it is exactly what won’t be done by this mob.

  2. DrakeN

    Dr. Ewins, something consistently remains unexplained in the use of the word “economics” and that is the actual benefit to the people in the society in which we live.
    Money and material wealth have no value where they do not contribute to the health and wellbeing of all of the individuals in a community nor where the pursuit of them creates insecurity, anxiety and unhappiness.
    It may be true that we are ‘wealthier’ than any generation before us, but whether we are any ‘better off’ in terms of mental, emotional and enjoyment-of-life terms is highly questionable.

  3. Dr Tristan Ewins

    I don’t expect what I suggest will be implemented by a Liberal government either. But you have to contribute to the debate in the hope that Labor might be influenced and listen ; and that the relative center may shift over time.

  4. Michael Taylor

    Tristan, in this country, under this government … good ideas are shunned upon. ☹️

  5. Jack Cade

    Tristan

    Your comments about Labor are anachronistic. Labor was executed in 1975. The party calling itself the ALP is a sham. Hawke was a neocon. Keating – whose smart-as-a-whip mind I admired – sold off the CBA. And look what that turned into!

  6. Dr Tristan Ewins

    Shorten’s platform was reasonably progressive given what we’ve become accustomed to the past 30 years. Labor is where the long game is ; and while the Left’s been on the back foot a long time progressive change in this country will have to involve the ALP. We need to recognise where Hawke and Keating went wrong and not romanticise those years. With a better campaign (and without Palmer) Labor could have won with a fairly progressive platform under Shorten. Labor’s gone back to a ‘small target strategy’ under Albanese – but that won’t last forever. The question is: will Australians continue to allow billionaires to effectively buy elections to get leverage with Conservative governments?

  7. Andrew Smith

    The question is: will Australians continue to allow billionaires to effectively buy elections to get leverage with Conservative governments?

    Exactly, see this replicated in the UK aka Brexit and Trump in the US (plus many less developed nations), symptoms of electorates being leveraged to implement radical right libertarianism, or 19th century capitalism joined at the hip with nativism, desiring lower taxes, less (good) regulation and fewer investments in government services.

    Related, article by Grattan Institute in TC on potential high speed train is an example in presenting binary of air vs. high speed train (ignoring middle solution of simply faster reliable train), dismissed train by claiming no short medium term full return on investment, hence the status quo remains……

  8. DrakeN

    Andrew Smith, any discussion of ROI must include public benefit if it is to be of value.
    Discussing things in simple economic returns to the original financial investor is a recipe for failure.

  9. Michael Taylor

    The question is: will Australians continue to allow billionaires to effectively buy elections to get leverage with Conservative governments?

    Tristan, it’s happened for the last three elections. I hope the average punter has learned from it.

  10. wam

    A great read, Dr Evans,
    HECS,there are already tens, perhaps hundreds, of thousands of men and women trained as nurses and teachers who have large HECS debt and no nurse or teacher jobs the debt for the poor ehd of town can be oppressive:
    For example, if you are on $52,500 a year, you pay 1%, which is $525. If you get a $500 raise to $53,000, you enter the 2% bracket and have to pay $1,060. An increase of $535 that erases your raise.
    It increases by CPI
    Pynenut wanted access to the estate of debtors and only ended up with pro-rata for the year of death.
    The rabbott opened the door for his daughter scholarship alma mata’s snout to hit the public cash trough.The CEOs and vice chancellors are the real exploiters of HECS and its dropout seeking cousin HELP bums on seats with 10s of thousands in university bridging courses who are functionally illiterate and enumerate.
    These school leavers armed with a certificate are seduced into loans for life slowly getting heavier and heavier. What will the debt be in 2030? How many women with a family will watch .partner paying off debt and leaving them to raise children whilst they piss off with a new partner.
    The thought of that personal debt’s possible effect on the already poor and unemployable is scary.
    My children have a home and permanent jobs and strong children so I can die selfish that our family has a good chance to flourish despite the shit that smirko will throw at the fan,
    ps
    sorry michael,

    billionaires were pretty well ineffective for the money but the queensland seats were boobby and his screaming women and the loonies could have been the cause of the tassie losses.

  11. B Sullivan

    How many times have we been told that the economy is a pie. and that the only way for everyone to get a fair share is not as you would think, to distribute the slices fairly, but to grow the pie?

    Well the economy may have shrunk, but so have emissions due to a shut down of non-essential economic activity. Wasn’t the last time emmissions went down in Australia back in the days of the Carbon Tax? I don’t recall its introduction causing a recession, but in any case it shouldn’t be that hard for an economist to work out how much revenue it might have raised if it hadn’t been axed and compare it to the cost of the last bushfire season.

    How many times have we been told that the cost of doing nothing about Climate Change will cost much much more in the future than the cost of doing something now?

    THe private sector wants a fossil fuel gas lead economic recovery and have Chief Scientist Alan Finkel backing them. Over thirty years Australia would transition to a hydrogen powered economy. But the hydrogen would be extracted from water using electricity generated by fossil fuels, provided by the private sector.

    The public (present and future) would be better served by going straight to green hydrogen extracted with electricity produced by solar, wind and other renewables. It would cost a bit more by today’s prices but those prices will drop and it would eventually cost much less over Finkel’s 30 year transition period.

    It’s all a bit reminiscent of the NBN fibre to the node, copper to the the home cost reduction solution.

  12. Michael Taylor

    wam, I was also referring to Murdoch.

  13. Dr Tristan Ewins

    Palmer got around 3 per cent ; not enough to win any seats ; but possibly enough to swing some seats to the Liberals on preferences. Spent over $80 million.

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