Time For A Comprehensive Approach To Economic Survival AndRecovery

Who remembers ‘whac-a-mole’? Before the animal rights people come down on me, it’s an arcade game. You stand beside the machine and little plastic moles pop up at random and you hit them with a soft mallet so that they return to their cave. 

Yeah, I know maybe not a good thing to teach kids, and there are lots of new digital versions. I have nothing against these furry subterraneans, but it was by far and away my favourite arcade game. You got to test your reactions, or lack of, and laugh at yourself, a lot. And no, the literal behaviour never transferred into real life, but the euphemistic behaviour has, you know, when there are a myriad of problems popping up and you must deal with them all at once. Life teaches us that sometimes while you’re busy knocking issues down one at a time you haven’t addressed the underlying problem.

A crisis presents us with a myriad of issues and hard choices. It is hard to get above the noise and respond in a comprehensive way. From a health perspective I feel we have responded to Covid-19 in a comprehensive way. Critics will argue about the timeliness, severity, unintended consequences (of which there are many) and efficacy of our strategy, that’s healthy and we should be prepared to adapt and learn. 

Now though our economic future seems to be determined by a public health expert, whom I admire greatly, I really do, but not for his economics. The economic response looks a little more like whac-a-mole (yes that’s how it’s spelt) than a strategic comprehensive response.

Over the weekend we got to hear about how Government is going to ensure company directors can be put in safe harbours when companies look like they might collapse as a result of Covid-19, on the back of what looks like an Institute of Directors plea. We also heard from both the Governor of the Reserve Bank and the Minister of Finance that there are likely to be many companies going into liquidation. So, we’ve chosen to protect company directors but not business owners. Yes, sometimes they are the same thing, often not. 

To my mind business owners have been last on the list of considerations so far, and yet, they are the ones who stand to lose everything through this crisis, that is, if they’re not considered an essential service, a definition fraught with contradiction and unintended consequences. I’m aware of the onerous legal compliance issues and risks put on directors, which has become a distraction, but really, that’s the priority? Mopping up?

Another choice we have made is to support Banks over business owners. Yes, all that Quantitative Easing (QE) you’re hearing about that the Reserve Bank is implementing mainly supports banks. Yes, it does have the secondary effect of driving interest rates down… waiting, still waiting. In a Bernard Hickey interview with ASB chief economist Jarrod Kerr (here) we find that liquidity in the banking system, that’s money they have available to lend to you, is around $21Bn; three times what might be considered the norm. RBNZ has just borrowed, on your behalf, another $25Bn for further QE measures which will give banks more cash to lend. They’re swimming in it.

The reserve Bank is your Bank. It is owned by the New Zealand Government on your behalf. It acts on your behalf to try and keep our economy on an even keel. It just borrowed $25Bn against your future tax contributions to give to the banks by buying government bonds of them, among other things. Hope you think that’s the best use of your money. You see, if you’re a retail bank your stock in trade is buying money cheaper than what you sell it for. Rest assured, they’re still making money when they sell you debt, in good times and bad at whatever interest rate. I’m not sure that’s the best use of our money in this crisis. 

No business is going to borrow more when their revenue is gone, even with a government guarantee, unless they see some light. Or, maybe, if it costs them next to nothing. Ways need to be found to shine some light on those shut down in our economy, safely, and it can be done. I was hoping for this kind of strategy from the National Response Team when they put some business expertise on there. Waiting, still waiting.

I have remained consistent in a call for negative interest rates, which as it happens, are not as good for banks as QE and better for businesses and private borrowers. This is a way of saving business and private borrowers by directly driving down retail interest rates. Zero would be good, 0.25% would be OK. I am very curious as to why the Governor of the Reserve Bank is not following his own advice (here) ‘Why Orr prefers negative interest rates to QE’. QE, with a dose of negative interest rates in some countries, was right for the Global Financial Crisis; a crisis in which confidence in Banks tanked as they and other purveyors of debt contributed to overzealous lending, trading in debt portfolios in housing markets, and negative equity, mainly in America. 

A Covid-19 induced worldwide recession is different, demand has tanked world-wide not just in New Zealand, or with one of our trading partners. Unlike the GFC, and possibly other parts of the world, our Banks are fine, for now. The first casualties in the lockdown have been businesses, not banks, through tanking demand. Businesses are wearing the brunt of the crisis. And, if businesses do not feel confident to take on more debt banks will suffer too in the end. Address the root problem.

Next major choice, the wage subsidy scheme. This is a fiscal response, meaning the government is spending, not the Reserve Bank. It is now heading north of $10Bn. It is turning out to be a lifeline for employees, and to a certain extent employers, but it is really a passthrough exercise for businesses, money in, money out. 

No income, no profit, fixed costs like rent still going out, debt servicing to be maintained and its tax time. AKA a cashflow crisis. QE, wage subsidies, a $6.25Bn government guaranteed business loan scheme, and now talk of helicopter money (Government giving you money) are all fine when you feel confident to borrow or spend and there’s something to spend it on. These tactics will have the unintended effects of digging deeper holes and playing god with the structure of our economy if we are not careful. Maybe rent relief next?

I am increasingly attracted to Michael Reddell’s suggestion of an “ACC” for businesses (TVNZ interview here). Let’s call it Pandemic Response Insurance. That is, bolster income through established businesses, so that you don’t have to play whac-a-mole with every issue that turns up on the cost mitigation side of the equation. That would put us in a different frame altogether, working on the primary issue in this crisis, tanking demand. 

He suggested insure (top up) businesses to a baseline level of 80% of income, if you’re above that no insurance. Income provided on a month by month basis on the proviso that businesses keep their employees on 80% of their usual income, and rent, debt and tax are paid in full as usual will keep money circulating, rather than what we are currently experiencing, a downward spiral in demand and disinvestment running to mitigate damage all over the place.

A Pandemic Response Insurance Cost right now? Yes, very large. But, one quarter (3 months) of certainty would put us in a fantastic position to rebound rather than the far more costly exercise of re-building our economy. Let’s think for a moment; 40% of our GDP is in the Public Sector, they won’t be eligible. Some businesses are booming as essential services, they won’t get it. As we expand trading in a Covid-19-Free (CV Free) way those businesses will lessen the burden. So, let’s say, we prop up half the economy for a quarter that would cost approximately $37.5Bn. That just happens to be less than the three numbers above added together ($41.25Bn). 

Yes, the former will not account for all the latter, there are time differences, and a cost benefit would have to be done, but there is a fair cushion there and it could be withdrawn at any time or incrementally reduced over time. This would replace the current patchwork of interventions with an inflationary stimulus from the frontline, one that would pass through the whole economy. People would remain employed, government would continue to collect tax, landlords would continue to be paid and employers can plan for recovery.

Secondary to that, but not less important, we need to embed resilience planning for the future, so, like the EarthQuake Commission, an investment fund could be set up for just such a purpose so we don’t have to lean on our balance sheet so hard next time.

As a result of the decisions we have made it is business owners who are the most exposed, our economic infrastructure, where failure has far reaching ramifications for society and the economy.

They, unlike banks in the GFC, did not bring this on themselves. These are choices we are making in a crisis and as Peter Drucker said, “The greatest danger in times of turbulence; is to act with yesterday’s logic.”

Dr David Wilson is founder of Cities and Regions Ltd, an independent research consultancy, immediate past chair, director and fellow of Economic Development NZ, and a member of the Independent Advisory Panel for the Provincial Growth Fund. He holds a BA in Psychology and Social Policy, a Masters in Public Policy (1st class Hons), a PhD in Regional Economic Development.

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