What is the exit strategy from COVID-19 shutdowns? New Zealand and Australia are conducting a real-time policy experiment to manage the health crisis. They have taken different levels of action to reduce the spread of the virus and limit the impact on the public health system.
The extent of community transmission and the development of a vaccine are two key variables to consider in this analysis. The cost-benefit of the lockdown will have made sense if these drastic measures avoid a significant loss of life. That seems to be a consensus view – get the lockdown done and then let non-essential firms start back up in a controlled fashion.
There is no doubt that both governments have a lot of serious analysis and modelling standing behind much of their decisionmaking. However, this will be a political decision for the respective leaders of each country. One of the disappointing things on social media is a complete inability of many even to consider the truth that tradeoffs exist when it comes to crisis response measures. That’s what we elect politicians to do on behalf of society.
The pain of this health crisis primarily falls on those affected by COVID-19 and their families. People die or have ongoing severe health complications because of COVID-19. Then, it falls on those negatively impacted by government public health measures.
There are apparent policy gaps in all of the financial support packages developed and deployed so far. For example, the behavioural response of some employers eligible for wage subsidy payments has been not to bother and just close their business down. Other employers have decided not to comply with employment law during a crisis, putting them at even higher risk of being successful on the other side of the bridge.
The decisions made in the heat of the moment have long-term consequences for many. The enormous increase in central bank support for the financial system in the interests of stability will take a decade or more to unwind. Remember, the US Federal Reserve had only wound down quantitative easing in a big way last year due to strong US economic performance. Now their balance sheet expansion is more than the Global Financial Crisis response in less than a month.
The problem for the government is that the horse has bolted on the economic consequences of the public health crisis. Many directors will have looked at the uncertainty and defaulted straight back to the GFC playbook – redundancies, conserve cash, slash cuts indiscriminately wherever possible. Many bankers will have looked at the support packages their banks have prepared and wondered how their credit policies and experience jibes with a panicked SME support approach.
I look forward to seeing more detailed exit strategy plans for both New Zealand and Australia. Already there have been far more people unemployed than either government expected, and severe issues with the support packages put in place. The focus on the top end of town will prove difficult politically, mainly if there are any further bailouts or special arrangements.