Morrison's Chickens

 At the heart of the conservative persuasion in politics is the inclination to do nothing. This follows from the deep conviction that whatever exists must be good -- otherwise it wouldn't. There is no way of proving the counterfactual, so commitment to conservatism is an intuitive position especially attractive to the well-off and privileged in society. This is understandable. If you are doing well then change, any change, is almost certain to challenge that happy state of affairs. If it ain't broke, don't fix it. Conservatives see the current institutional order of society as 'natural', the result of a slow, organic evolution of what works -- in politics, the economy and the wider community. Edmund Burke's 'little platoons' and the wonders of the free market work together to create a functioning social world. The same wisdom of history weeds out the dangerous and noxious innovations of rash reformers too keen to tamper with nature's machine. Voters in parliamentary democracies also tend to lean towards caution over experiment, even the majority who only do moderately well and, more surprisingly, those who get the raw end of the deal. Whereas in financial markets sentiments swing between greed and fear, in politics these basic human drivers reinforce each other. Findings in evolutionary and moral psychology provide reasons for this, not all convincing, that appear to be supported by the politically dangerous explorations of the neurosciences.  

It is for these reasons that conservative governments tend to win and keep government in good times in Australia. Only in extremis or when the standing government's incompetence or corruption has exhausted voter patience are reformist governments given a try. But even then, they are on a short leash, as the Australian Labor Party found in 2010 and 2013 (and 1975). The tendency to sit back and hope for the best works in most cases. But when a major crisis erupts, complacency is no substitute for resolute leadership. In an earlier blog post this year (Australia is Burning, January 7th, 2020) I pointed to the tardy federal government response to the massive wave of bushfires sweeping Eastern Australia. This was in part due to the Morrison government's primary aim of bringing in a budget surplus this financial year, and the Prime Minister's tin ear. But it was also consistent with the true conservative's faith in leaving things alone to fix themselves.

Australians had barely digested the enormous financial and emotional shock of the bushfires when an even greater crisis was upon us -- and the rest of the world. The most serious pandemic for a hundred years swept out of China. Covid -19 is, as I write, effectively closing down the major economies of the world. Existing economic models are useless in forecasting the likely impact on national economies, even to the extent of establishing meaningful ranges. At the very least, another Great Recession, 2008-9 style is on the way, but the prospect of another Great Depression 1929-33 style is possible: and things didn't go well that time.

As happened with the bushfires, the Australian government was slow off the mark. Still concerned with his government's promise of delivering a surplus and maintaining its reputation with voters of being the superior economic manager, the Prime Minister gave mixed messages about the scale of the impending disaster. It took weeks for public health professionals to reef the message stick away from Morrison and for the latter to step sideways (almost) to concentrate on convening a 'national cabinet' on wartime lines to deal with the day to day tasks of shoring up the economy. (This happened at about the same time as President Trump finally entered the real world [almost] and started to give over the health crisis management to the public health officials and experts he hadn't sacked.) A first stimulus package of A$17 billion was almost immediately seen to be inadequate as the virus hit the upside of the exponential curve of infection. Within days a second package at over A$10billion per month targeted at maintaining household income and business cash flow has been mooted. Fiscal stimulation will need to be maintained at a high level indefinitely. The first part of this second package, headlined at $66 billion and a subsidised business loan scheme, is focussed on cash grants and loans to small and medium sized businesses in the hope that they will keep paying their existing workers. The promise to help the unemployed and underemployed is yet to be redeemed.

Morrison, like Trump, has spun on the proverbial dime. The former is on notice given his disastrous mishandling of the bushfires. Trump, facing re-election in November, apparently caught on that blaming foreigners and contradicting health professionals wouldn't cut it, especially after his acolytes at Fox News began to wobble at the knees. Both seem to have realised that - in George W's words after nine-eleven - 'this sucker could go down'.

In Australia's case, the message coming out from Canberra is still not clear. The Prime Minister has been consistently behind the curve. Should we move to lock down? When? Should we close all schools? When? The perception among some public health professionals and some state government officials and Ministers is that the Canberra bubble is massaging the message in order to keep the financial cost of bailouts to a minimum consistent with staving off the cliff plunge to economic depression. A (slightly) more charitable view is that, so unprepared were we as a nation, that keeping the schools open buys time for the health system to power up before the deluge of infections arrives (currently expected in early April). In effect, schools become creches (and Petri dishes) , and teachers and pupils are being sacrificed to keep health and care workers working. This is a view that has been aired by some teachers and their unions. Underlying the emerging conflicts over the schools issue is the nagging thought that we, the public, are not being given the full picture; that the strict controls over who is being tested for the virus is partly to protect government from the criticism that an inadequate stockpile of testing kits was not more immediately available. (I wrote about the declining trust in our political institutions and politicians in my last post: “Whatever Happened to Chook Fowler”, March 3, 2020) A more conspiratorial view is that the number of tests has been kept down in order to understate the number of positive cases. A more convincing cause of the likely understatement of infections is the lack of knowledge of this virus concerning when and for how long before and after symptoms appear, a carrier is infecting fellow Australians. The true number at any time may be greater by a factor of ten. Australia may already be approaching ten thousand cases most of which are not yet diagnosed. If so, this is probably a hopeful sign, but only as long as the actual death rate does not suddenly catch up.

Australians, like people throughout the world, are dealing with a double-crisis: first and foremost, the reality of a deadly global pandemic; second, the derivative impact to their livelihoods and everyday lives. Likewise, governments must deal simultaneously with both challenges. On the economic front it is now pretty clear that the scale of the financial bailout to industry and households will dwarf that following the GFC. The Reserve Bank has fired all its interest rate bullets and is now moving to what we might call 'orthodox unorthodox' policies of quantitative easing. This involves the Reserve buying up existing government bonds from the banks, pushing up their price to keep interest rates low, while creating liquidity in the financial sector. The idea is that the banks will lend to investors and households who will spend and drive the economy upward. There are two problems with this approach. First, it doesn't work, or at least it had only weak positive direct effects when tried in the wake of the GFC; the main effect was to drive up financial asset and property prices and increase economic inequality, with very modest indirect stimulation of demand mostly through what economists call the wealth effect. Credit worthy borrowers don't want to borrow, and banks won't lend to those who are desperate enough to spend if only they had the cash. Second, this emerging economic crisis is not only on the aggregate demand side of the economy. Aggregate supply is constrained by the inability of workers to get to work, even healthy ones, causing bottlenecks in supply chains and increasing the likelihood of disruptive panic behaviour by consumers. This has led the Reserve governor to beg the federal government to adopt a more aggressive fiscal policy, a plea that has been reluctantly heard. Even though the coalition in Opposition vocally and for a decade decried the main planks of Labor's bailout during the GFC, they are about to copy it under licence and drop large cash payments on low income households and small businesses. Apart from the hoped for demand stimulation, this is necessary on humanitarian grounds and will need to be continued indefinitely, financed by the sale of new government bonds. All mention of the resulting blow out in the federal (and state) budget(s) and the pile up of government debt has been quietly shelved. Only Labor will be prepared to mischievously hint at it from time to time, in relation to a nostalgic justification of their own handling of the GFC more than a decade ago.

There is a third approach to the economic crisis: drop 'helicopter money' widely over poor neighbourhoods. The Reserve Bank can simply print money and give it directly to low income households, including casual and gig workers, and small businesses that would otherwise go bankrupt. This could be handled by crediting recipients bank accounts. This differs from quantitative easing in that the recipients receive the cash as a gift without having to give over collateral (they don't have) or repay in future. The longer this 'unorthodox unorthodox' monetary policy goes on, and the wider the drop, the more likely people will lose faith in the currency and the more likely inflation will break out. This wouldn't be a problem in the short term, may even lift animal spirits, since inflation is currently close to zero. But once started, inflation has historically proved to be a dangerous beast to tame. To rely on helicopter money also blurs the line between fiscal and monetary policy, as it does not show up as debt of the government's balance sheet. For most economists this is worrying since it removes the discipline on governments to control their future spending promises, by over-relying on the helicopter, though proponents of modern monetary theory wouldn't mind. But, more importantly, recourse to the helicopter does nothing to relax supply constraints; only getting on top of the pandemic as the primary task will do that. This will mean having to cop the very high economic costs over a pronounced period. It is government's role to ensure that this cost is spread equitably across the population and not concentrated by default on the most vulnerable sections. We live in troubled times.

To be fair to the politicians, they are dealing with a double-crisis that none have been prepared to face. This is especially so for those on the conservative side of politics. The default policy of letting things slide won't do. Morrison is canny enough to know this and flexible enough to change tack and assume a statesmanlike persona. He has discovered his inner-Churchill and emerged as the picture of the calm father figure, pulling together a 'war cabinet' of federal and state leaders and experts committed to saving the country. He might pause to reflect on the fact that in the real war Churchill's cabinet included the leaders of the Labour opposition and the minority Liberal Party in the House of Commons. Australian Opposition leader Albanese is still waiting for the phone call, though by the time you read this the phone may have rung. The problem for the Prime Minister caused by including Labor and any other minor party is that it cramps the Prime Minister's style - that is, his ability to massage the message and, especially to dismiss future criticism of failings by claiming to be in receipt of expert information denied to those outside the inner sanctum. Morrison also does not wish to give his political opponent a chance to demonstrate his credentials as leader of an alternative government. (It should be noted that in the real war, Labor's Chifley also declined to invite the conservative coalition into his war cabinet.) The Prime Minister benefitted from a self-proclaimed miracle at last year's election. He needs another this year if he is to avoid being cast as the lead in "Death of a Salesman".

On the other side of politics, Albanese may well be thankful to be excluded and thus left free to express bipartisan public support for a unified policy attacking the crisis while carefully pinpointing specific failings and gaps in the Morrison war cabinet's operations, and helpfully suggesting remedies. All in all, when looking back in future years, the May 2019 federal election may turn out to be a very good one to have lost.