As bad as the Great Depression

We are starting to see the economic impact of Covid-19 with the announcements in the last few days of the closure by Bauer Media of its magazine publishing business in New Zealand and by NZ Media Enterprises of its Radio Sports network. Many other businesses are already struggling and we can expect to see many more announcements of closures and receiverships, notwithstanding the Government's wage subsidies and other handouts. The surprise expressed by Prime Minister Jacinda Ardern at the Bauer Media decision only shows her ignorance and insensitivity to the costs being imposed on New Zealand businesses. Of course, the Government's insensitivity didn't start with the Covid-19 response. Its treatment of landlords, farmers, banks and many other businesses as pariahs had already served to stymie business confidence since the socialist-nationalist-environmentalist coalition took power in October 2017. Only this week we have seen the implementation of a new minimum wage law, which prevents businesses from employing anyone for less than one of the highest minimum wages in the world. The government chose to go ahead with imposing this significant increase in costs on businesses despite the obvious signs that many companies will not survive the Covid-19 lockdown.

Make no mistake, we are in this Covid-19 situation for the long haul. Even if we bring the spread of the virus under control during the lockdown in New Zealand, and that is by no means certain at this time, it is going to continue in other countries for many more months, which means we will need to keep our borders closed for that time. Our tourism industry is facing a long period of utter devastation and many of our exporters may lose markets during this period. Domestic businesses such as retailers and restaurants will recover somewhat after the lockdown ends, but many companies and individuals will continue to hunker down, not investing or spending until they are sure the economy is well on the way to recovery. The OECD estimates [H/T Michael Reddell] that the impact of the Covid-19 shutdown on New Zealand will be amongst the worst of its members at nearly 30% of GDP, which is a similar impact to the Great Depression.

The Government will be gambling on an economic resurgence as soon as the lockdown ends. It will try and spend its way out of the downturn, as it always does. It will prime the economy with a flood of cash such as we have never known, and it is already doing this by hiking welfare benefits as part of its $12.1 billion "economic recovery package". The problem is that this money won't go a fraction of the way to covering the business and individual losses from the lockdown and consequent recession. Besides, the economic situation is primarily a supply-side (i.e. business investment and revenue) problem and governments today seem to only understand demand-side (consumption) policies.

Many politicians and voters don't seem to appreciate the reality that every dollar spent by the government needs to come from taxpayers, who need to earn that dollar in order for the government to take and spend it. Even when the government borrows money to fund its splurge, it is just postponing the bill to future taxpayers. The problem for many Western governments is that they are already overextended in terms of government debt and these events are just going to make the situation worse. Countries like the United States will be counting on the fact that they will quickly recover to their recent levels of strong economic growth, but while New Zealand is in comparatively good shape in terms of the government's balance sheet, no one can have a great deal of confidence that we are going to grow our way out of the hole we are digging for ourselves (the US GDP per capita growth rate has hit nearly 4% in recent years compared to New Zealand at less than 2%).

The reality of Covid-19 hasn't really hit the global economy yet. The recent falls in stock markets around the world have only taken us back to where markets were about three years ago. Once companies begin to announce the expected impact of Covid-19 on their earnings, I believe we will see significantly greater drops. The property market hasn't really shown any impact yet (other than a pause in sales), but given that some commercial tenants are simply refusing to pay rent during the lock down, we can expect a significant down turn in prices to reflect lower earnings in this sector as well. The reductions in earnings will mean more layoffs of employees, greater losses to investors, and even lower taxes to fund the government splurge. We will be in a race against time to recover from Covid-19 before we lock in the greatest economic downturn since the Great Depression.

I have written before about how complacent New Zealanders have been in recent years. I have been pessimistically confident that a significant economic downturn was coming, and although I didn't predict it would be due to a pandemic, I was expecting it to come this year. Now that it is here, I think we lack the political leadership in New Zealand and in many other countries to respond effectively. But that topic is probably best left to another post. 

Assessing the NZ Government's Handling of Covid-19

How has the New Zealand Government done so far in its response to Covid-19? Well, if you believe the New Zealand media, Jacinda Ardern and her government are just rocking it!

There is no doubt we had to take measures to stop the spread of the virus within the community. If you want to understand the strategy behind the containment, this article by Tomas Pueyo in Medium is the most informative I have read on how you bring Covid-19 under control. Different countries have had variations on the strategy and some of the most successful in containing the spread of the virus, such as Korea, Singapore and Taiwan (and yes, you weasels at the WHO, there is a country called Taiwan), haven't gone into the full lock down like New Zealand. These countries were better prepared for the outbreak, probably because of their experience with SARS in 2003. They tracked infections, tested extensively, and quarantined all those who test positive.

The preparedness of the New Zealand Government compared with these countries is poor. Our health system is still not in a position to do sufficient testing as the Government's own chief science advisor wrote in this report posted on Twitter by Joel Hernandez of the NZ Initiative. We need to do both virus antigen (to detect if someone is currently infected) and antibody (to test whether someone has had it and is now immune) testing to ensure we stop transmission in the community. Dr David Skegg, emeritus professor at Otago University's School of Preventive and Social Medicine, also told Parliament's Epidemic Response Committee this morning that New Zealand's response was inadequate and that in particular we needed to step up testing. Unfortunately, we can't step up testing because we still don't have enough test kits.

It is not as if the Government had no warning. I was warning on Twitter about the impact of Covid-19 nearly two months ago. Others such as economist Michael Reddell were blogging about the Government's seemingly lackadaisical attitude to the evidence coming from China and elsewhere about its potential impact on New Zealand. Obviously the advice of bloggers and tweeters weren't likely to carry much weight with the Government, but by mid-February another epidemiologist from Otago University, Dr Michael Baker, was publicly warning about the threat. Jacinda Ardern seems to have been particularly careless, reassuring us as recently as a couple of weeks ago that public events such as the Christchurch mosque attack memorial and Auckland's huge Pasifika Festival could still go ahead. You could argue that she may have had poor advice, but perhaps the single most important attribute of a good leader is to find and distil the best advice.

The most galling aspect of the current lock down is that we could've prevented it. If we had introduced strict quarantine at the border and made provision for widespread testing much earlier, like South Korea and others, we probably wouldn't be in the situation we now find ourselves. We all have to pay a high price to bring this disease under control and that cost is now as much in our liberty as our wallets. I don't think there is anything to be gained at this time in castigating the Government for their earlier inaction, but let's not give them undue credit either. Hopefully there will be a reckoning after all this is over.

At this stage, I'd give them a C-.

Turning a Rock Star Economy into a Basketcase

In 1984, the newly-elected Labour Party Government saved New Zealand from becoming a third world economy. Prime Minister Robert Muldoon's Stalinist economic policies had resulted in high inflation, increasing unemployment, a run on the dollar. and the imminent failure of the country's largest bank. The new finance minister, Roger Douglas, devalued the dollar, deregulated the economy, sold off inefficient state assets, and the economy recovered to experience a period of sustained growth for the next three decades that was interrupted only by global economic downturns. Roger Douglas's liberal economic policies continued with remarkable consensus under successive governments but now the Labour-New Zealand First coalition government seems determined to undo all of its predecessors' good work.

New Zealand was acclaimed as a 'rock star economy' after the 2007 Global Financial Crisis because of its resilience in the face of rising debt and sluggish growth in the rest of the world, but as economist Michael Reddell points out (here and here), our economy hasn't really been performing that well since the mid-2000s.

So what is the new government doing that risks our economic performance? The answer is almost everything. It has banned oil and gas exploration at a time when other countries such as the United States and Britain are freeing up regulations and encouraging investment in new fossil fuel extraction technologies like fracking. It has introduced new petrol taxes, which will raise the price of everything that has a transport cost, and it is about to introduce its Zero Carbon Act, which (as Michael Reddell points out here) will reduce our GDP by between 10% and 22% by 2050.

The government is choosing to pick winners with its cronyism Provincial Growth Fund, which is based on the mistaken belief that taxing people and businesses so that the government can dole out money to other businesses is good economics. It is increasing welfare payments across the board and eliminating incentives for beneficiaries to get back into work. It is raising the minimum wage to one of the highest in the Western world and it is pushing 'fair pay' - forcing employers to pay workers more than their market value - which of course will reduce demand for labour, thereby increasing unemployment (because, in reality, the minimum wage is always zero). The government is also reviewing tax, through its Tax Working Group, and if New Zealanders don't believe the result will be to increase taxation across the board they are deluding themselves.

All of these policies will be a dead weight on our economy, dragging down its already non-rockstar performance while other countries continue to soar past us. The net effect will be to make New Zealand, and New Zealanders individually, poorer compared to the rest of the world. I have travelled all around the world and have seen the stark contrast between countries that have high GDP per capita and those at the other end of the scale. New Zealanders take their relatively high standard of living for granted and do not realise that prosperity is fragile. I don't want to live in a poor country but it seems that is where we are headed.

The truth of the rock star analogy has always been more Ozzy Osbourne than Taylor Swift, but if we continue down the path the new government is laying out, even the aging Black Sabbath rocker will look more lively than New Zealand's economic performance.