The Economy versus the Virus
Last Tuesday there was a debate in the Prime Minister’s office between two leading economists: Henry Ergas a former professor of economics and columnist for the Australian and Warwick McKibbon, Professor of Economics at the Australian National University. Dr. Ergas argued that the Government’s response to the health crisis needed to be proportionate to avoid the destruction of the economy. Professor McKibbon countered by proposing a lockdown of non-essential services with business being supported by income contingent loans along the lines of university HECS loans.
In New Zealand they have moved to a strict lockdown policy which entails the closing of all non-essential businesses, people remaining inside their houses for four weeks and everyone working from home. If people go out they are required to remain within their immediate suburb. New Zealanders are supported by income support payments paid directly to employers who must pay it to their employees even if they have laid them off.
There are estimates that this will limit deaths in New Zealand from coronavirus to 20 but at the moment no-one has estimated the deaths likely to be caused by the lockdowns through domestic violence or issues such as starvation and neglect. There are also no estimates of how much damage will be done if the lockdown goes on beyond four weeks. Some modellers believe that the measures will have to be imposed until there is a vaccine if the infection is to be contained.
On Sunday the Australian Prime Minister, Scott Morrison, announced a new set of restrictions. He said that the rate of increase in infections was falling. It was now 14% compared with 25-30% a week ago but even so we needed new restrictions. Public gatherings are now limited to two persons unless it is a family. Public playgrounds are now closed. People must stay at home unless shopping for things you need, or undergoing medical treatment or attending essential work. Over seventies must self-isolate. Landlords and tenants must achieve an arrangement so the tenancy can continue. If landlords cannot reach an arrangement with tenants they will not get government assistance. Banks must also co-operate to ease the pressure on landlords if they have negotiated deals with tenants. The current restrictions will remain in place for six months.
The question is how much this will cost the economy. Professor Warren Hogan of University of Technology Sydney has predicted tht the unemployment rate could reach 15% and the reduction in GDP could be as much as 20%. This is twice as much as the reduction during the Great Depression. J.P. Morgan has estimated that the Chinese economy will shrink by 40% and the U.S. economy will contract by 25%.
As an indicator of the impact of restrictive measures, one study estimates that closing schools for 13 weeks will cost the economy 8.1% of GDP. As a consequence of the economic downturn Australians could be up to 20% poorer.
To put the health crisis in perspective Dr. Ergas makes the point that 430 people die in Australia every day. The great majority of them like the great majority of coronavirus deaths are people over seventy. So far in Australia 16 people have died of the virus in the space of four weeks. At the same time the contraction of the economy is reducing the capacity to resource health services into the future. This may mean that more lives are lost later because of a lack of health funds than are saved now through draconian policies.