The Great Crash - Q&A

Things feel OK in Australia at the moment - restrictions lifting, a large welfare program that seems to be working reasonably - but you suggest it’s going to get worse. What do you think that will look like?

The huge fiscal expansion inherent in the JobKeeper, JobSeeker and other emergency programs announced in March and April have placed a floor under economic activity. The June quarter is nevertheless experiencing a large reduction of employment, incomes and output. While activity in Restricted Industries will recover to some extent in the September quarter, the economy will remain very weak. If the March and April stimulus measures are withdrawn in September, there will be another large step down in economic activity. But if the stimulus is maintained and its focus shifted to measures designed to increase future productivity and living standards as well as hold up demand, we can begin the return to Full Employment. These matters will be the subject of lectures 3 and 4.

Specific question on aviation: The CORSIA 2019/2020 emission trading baseline could be 25% lower with COVID-19 than without. If only 2019 were taken as baseline (as IATA suggests) the aviation sector would likely not face emission control for the coming years. What is the correct balance of supporting a vital international sector versus triggering innovation and low emissions at the time of “reset” for the aviation sector?

Meeting more demanding rigorous emissions reduction targets based on 2020 emissions would not be a major factor inhibiting recovery of civil aviation. The sector will have to make the adjustment to zero emissions, and recession is a good time to make the investments required for transition.

If we combined the number of people on currently JobSeeker (1.6m) and JobKeeper (6m) who are technically not working, but being paid as welfare by the state; we are at this startling figure of 58% of the working population. This is data both provided by ABS and also Commbank. Have we ever seen such a magnitude of unemployed? What is the road to recovery to deal with such an enormous figure? Are we moving closer to a UBI (universal basic income) to deal with medium term welfare dependency, or a reframing of what welfare really is in Australia?

In lecture 4, I will propose an integration of the personal income tax and social security systems that would encourage labour force participation and underwrite basic incomes. The reform would be highly stimulatory while unemployment persists—as are JobSeeker and JobKeeper—and the stimulus would diminish as we approach full employment.

Agree that Australia has done better on minimising economic downside than other developed countries. Do you think this is the reason the AUD has picked up from its sharp fall earlier in March?

The fiscal expansion is one reason for the strengthening of the $A since March. Other developed countries’ more far-reaching monetary expansion, and the catastrophic pandemic recession in some developing countries, have also been important.

Is one policy response to make permanent the current crop of temporary migrants?

Wouldn’t arbitrarily change the rules for permanent migration because of current circumstances.

Do you think the time is right for a cash flow tax?

Now is a good time for a cash flow corporate tax. I discuss this in lecture 4.

I'd appreciate Professor Garnaut's thoughts on the negative impact of internal cross-border travel restrictions and the positive impact of a possible Trans-Tasman and wider travel 'bubble'.

Where there are different incidences to the disease in different parts of the country, there are good medical reasons for restricting travel between regions. I am not in a good position to judge whether the current restrictions are justified by the medical realities.

How do you see philanthropy’s role in the recovery - and how do we ensure they take a gender lens to their giving given the disproportionate impact on women.

Yes, this pandemic has been most damaging for young people and women. Philanthropic groups make their own judgements about priorities—but the questioner and others can seek to influence them.

Do you think that the challenge is so great that a national government, as has happened in wartime, is appropriate?

This is a very big challenge, and the formation of a national body including the heads of Government of the Commonwealth, States and Territories has contributed to good policy outcomes. The Australian wartime Government didn’t include State as well as Federal leaders, and didn’t include Opposition figures in the formal decision-making processes. So, there is a sense in which the arrangements for COVID-19 are as close to a national government as we had in wartime. Although the leading Opposition figures were invited into major discussions.

Does Professor Garnaut think that reliance on science could become integrated into political decision making following the experience of COVID-19?

Australian policy has benefited greatly from drawing considerably on science in COVID-19. It would be good if this encouraged greater reliance on science in future on other policy matters, it will help, but we will have to wait and see how much.

Do you expect that the enormous stimulus packages quickly distributed will affect both inflation AND unemployment long-term, as this pandemic continues threatening globally?

The stimulus so far will not affect inflation, as we have high unemployment. It will help unemployment in the long term a bit, because it will reduce the loss of labour skills and the weakening of businesses. But long-term unemployment will depend much more on tomorrow’s policies than todays.

You mentioned the outsized contribution from population growth to headline GDP. Can you discuss the trade off between headline GDP and the erosion in living standards (congestion, house prices and rents etc) that very high population growth entails? Should we aim for a lower level of population growth post COVID-19?

I think we would be wise to reduce the levels of net immigration after the pandemic closer to the proportion of the population in the Productivity Boom 1992-2002; to return to primary focus on permanent rather than temporary immigration; and to return to stronger emphasis on valuable education and skills in the immigration program. This would lead to larger increases in per capita income, and higher incomes at the low end of the income distribution, but to lower rates of total GDP growth.

Stimulus and liquidity announced to date has largely targeted immediate cash shortfalls for individuals and business, let alone the potential multiyear recovery to come. How big can it get and should we be concerned?

We need continuing stimulus on a very large scale, but there would be advantages in shifting the emphasis of expenditure over time towards activities that contribute to future incomes growth as well as current demand maintenance.

We observe dramatic differences in mortality and infection, yet relative economic activity does not seem to be proportionally affected... Is that due to irrational economic behaviour or global economic connectedness?

We haven’t yet seen the end point of the relationship between the incidence of COVID-19 and economic impact. There does seem to be a tendency for countries which quickly stop its spread to return to economic growth earlier, but we have lots to learn from continuing observation.

If AU policy performance needs to be better than of other developed counties, how are we going to overcome the devaluation of expert knowledge? Good policy relies on expert knowledge, and unfortunately its devaluation seems to be significant in countries as US, UK, which can affect AU policy.

Yes, the English-speaking countries’ health, economic and other performance has been damaged by downgrading of knowledge in recent years. Australia so far has not been as bad as the US and UK. I hope that the COVID-19 experience of Australia, the US, the UK and other countries will teach a lesson about the importance of respecting knowledge in the policy-making process.

When restrictions lift, how much do you see the behavioural aspects involved with the virus (e.g. not wanting to leave the house) depressing demand/spending from pre-virus levels?

I expect some behavioural impacts of the virus and the restrictions to influence economic behaviour for a long time. I expect that there will be less aeroplane travel; probably less use of restaurants; more generally less enjoyment of crowded environments; more use of electronic communications in business, education, health and social interaction. I would be surprised if the Australian savings rate is not higher over 2020 and the few years that follow than over the previous few years.

How do we perform risk management of further catastrophic events similar to this? What actions could government take? Is Australia diversified enough in terms of commodities and trading partners?

This was a medical emergency and then a global recession. We were not badly prepared for a pandemic with reasonably good public health and specialised pandemic capacities. Neither were we badly prepared for recession, with Governments ready to respond quickly with stimulus, with low levels of public debt, and with a fairly flexible economy. Interventions to reduce our use of opportunities for profitable trade would make us poorer, and I am not sure would make us less vulnerable to recession. We are fortunate that our biggest trading partner, China, will probably suffer less decline in economic activity than any other major (G20) country.

On the debt some major world government's had before this crisis and which is further exploding during this pandemic, do you see that as a risk for financial stability?

The public debt to GDP ratios of the world’s first (US) and third (Japan) biggest economies are stunningly high. Just at the moment, and for the foreseeable future, these are not problems for global financial stability because of a great surplus in global private savings over global private investment. Circumstances could arise in which they could become problems.

Do you think our Treasurer has the ability to sway the right within his party, to be a leader that will invest in sustainability?

The Treasurer alone cannot do it. The PM and Treasurer could if they thought that it was important. Let’s see if we can explain to them why it is important for them to do so.

What is the impact on Australia’s other big export: higher education? We focus so much on tourism and raw minerals. Why are the federal government’s actions so destructive to a sector that is future-thinking, generative, and economically lucrative?

The damage to higher education could be one of the most damaging effects of the pandemic recession on long term Australian economic performance.

Should the federal government support Australian property to prevent a collapse in prices?

The best thing that the Australian government can do to support property prices is to adopt policies that achieve Full Employment quickly and lay a foundation for a return to rising Australian incomes and living standards.