MICHAEL KEATING.- Good health policy is good for the economy

Mar 27, 2020

The Government seems to think that it must balance the needs of the economy against the actions needed to stop the spread of the coronavirus. In fact this is not true, and Australia’s future economic capacity will fall if the virus is not defeated as quickly as possible.

The rate of spread of the coronavirus has no doubt surprised most of us, or at least those of us who are not health experts. That is probably one reason why so many people have been slow to take the recommended precautionary actions, until they have been compelled to do so.

With the virtue of hindsight, however, it does seem that the Government has also been playing catch-up with both its health response and its economic response. Furthermore, it seems almost certain that more action will be needed on both fronts.

One aspect of the decision-making process so far that is particularly worrying, is that the Government seems to see some sort of trade-off between the requirements of health policy and the economy. Action to constrain the spread of the virus is typically viewed as imposing a cost on jobs and the economy.

According to Scott Morrison every job is essential. At all critical points he has been reluctant to close down activities that provide employment. First, it was allowing spectators to gather to watch the rugby one more time, then it was his opposition to keeping kids at home from school. Now for some inexplicable reason, hairdressers can stay open, but other beauticians cannot. Similarly, childcare centres can continue to care for small children, but parents are encouraged to keep their school-age children at home.

Now no-one wants to close premises and throw people out of work, but the evidence is accumulating that delaying such decisions, will lead to greater job losses later on and these losses will then last longer.

Critical to the future of the economy and jobs is that we strictly observe social distancing as that is the main way available to Australia to prevent the spread of the virus. And as I will elaborate below, if we don’t slow and then stop the spread of the virus the damage to the economy will be very much worse.

The spread of the coronavirus

The evidence and the modelling showing the spread of the virus is very compelling. Essentially the spread of the virus is exponential as the virus is passed from one person to another unless checked by intervention.

Australia is still in an earlier stage than many other countries, and so far the rate of spread is a little slower than in the US, China (at first), Italy and the UK. But the number of cases here in Australia is still doubling close to every three days, and they’re growing much faster here than in Singapore, Taiwan and Japan (ABC website).

Around the world the strategies that seem to be working are: acting early, extensive testing and contact tracing, and physical distancing.

Australia did act early to restrict arrivals from China, but it was less consistent in restricting arrivals from some other countries, such as the US and Italy. Australia has also done more than 160,000 tests for coronavirus (as at 25 March), and Scott Morrison says this is one of the highest test rates per capita in the world. But the testing and follow-up contact tracing in Australia is nothing like as rigorous as in Singapore or Korea – both of which are bringing the spread of the virus under control.

According to Dale Fisher (chair of infection control at Singapore’s National University Hospital), the key to Singapore’s response has been how well it has executed the strategies for quarantining and tracing people who had come into contact with the virus. The location of people who are affected can be traced through their mobile phones, and the they also have surprise visits from the authorities, while the penalties if they break quarantine are harsh.

Although South Korea was initially less successful in constraining the spread of the coronavirus, the scale of its testing has turned the tide. South Korea has a network of 96 public labs and began testing nearly 20,000 people a day, including at drive-through testing stations. It has now tested more people than most other countries – more than 280,000 tests as of March 19, or one in every 180 people (ABC website).

Clearly it would be better if Australia increased its capacity to do more testing and follow-up contact tracing. But assuming this presents difficulties in getting access to the necessary equipment, then that leaves only enforcing more physical distancing if we want to bring the coronavirus under control.

The economic impact

Obviously more physical distancing will have an impact on the economy. Closing more premises will throw people out of a job. Professionals may be able to work more from home, but as Jeff Borland described in Pearls & Irritations (26 March)JEFF BORLAND.-. COVID -19 and the Australian labour market: The immediate impact )close to 3 million people could find themselves out of work, and the majority of these people providing personal services are not highly skilled. In addition, demand is likely to fall significantly as incomes contract, and that will put further downward pressure on the economy.

The Government has tried to convince us that when the virus is finally defeated – as it eventually will be one way or the other – then the economy will “bounce back”. Frankly I find that very simplistic. A lot depends upon how long it takes to defeat the coronavirus.

The premise underlying the Government’s wishful thinking about the economy “bouncing back” is that the economic capacity of the economy will not be damaged by the inevitable recession, or worse.

The Government’s economic response therefore aims to sustain demand by providing some income to those who have lost their jobs and their income, and to assist firms to borrow so that they can resume normal operations when the economy recovers. The economic problem, however, is that:

· the longer people are out of work, the more their skills attenuate and the harder they find it to get a new job, and

· many small businesses, such as cafes and restaurants, cannot afford to keep incurring expenses with no revenue and go into debt for long, no matter how generous the terms, as they cannot see how their future revenue would be sufficient to repay the loan.

In short, if the coronavirus persists for as long as six months – and that seems very possible – then it is hard to see how that cannot damage the economy’s future capacity.

In addition, Australia went into this recession with a very sluggish economy. Household incomes, productivity and business investment were hardly growing for the last three years or more.

Thus, the main conclusion is that it is essential for the future growth of the Australian economy and people’s living standards, that all possible action is taken to constrain the spread of the coronavirus and in as short a time as possible.

Modelling at Sydney University shows that if in addition to existing measures like travel restrictions, 80% of the population comply with physical distancing guidelines and cut out nearly all social interactions, then the rate of Corona virus infection will start to decline in a few weeks.  However, if the compliance rate is only 70%, then the number of infections will continue to increase for months.

I accept that enforcing social and physical distancing will be hard. It does have a negative social and economic impact, but the negative impact will be so much worse if we don’t defeat the coronavirus as quickly as possible.

Michael Keating is a former Head of the Departments of Prime Minister & Cabinet, Finance, and Employment & Industrial Relations. He is presently a Visiting Fellow at the Australian National University.

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