Leading epidemiologists in Australia and overseas have begun expressing optimism that an effective vaccine for COVID-19 might be available by the end of the year. Economic forecasters implicitly have been making the same assumption, continuing to predict a V-shaped recovery as a vaccine is administered on a massive global scale. But what if they are wrong? A team of leading economists should be working now to map out an economic strategy to respond to sustained period of rolling lockdowns, followed by re-openings and renewed lockdowns.
After 17 years, no effective vaccine has been found for the related viruses, SARS and MERS https://theconversation.com/fast-covid-19-vaccine-timelines-are-unrealistic-and-put-the-integrity-of-scientists-at-risk-139824 COVID-19 appears to be much more infectious and is certainly more widespread. The National Cabinet mercifully has decided against a strategy of herd immunity, unwilling to accept the inevitable death toll.
That leaves a strategy of containment, involving social distancing, quarantine, contact tracing and, where outbreaks occur, shutdowns.
If there is no timely and effective vaccine, the present level of economic support being provided by the Commonwealth will be capable of sustaining the economy only at a level of activity consistent with a long and deep recession.
In its Statement on Monetary Policy released last Friday, the Reserve Bank has begun contemplating this sort of scenario. It first considers a baseline scenario in which the unemployment rate almost reaches 10 per cent and only gradually declines to 7 per cent. The recovery remains V-shaped, similar to the Reserve Bank’s forecast in May 2020, but with a slower pace of recovery.
As one alternative to the baseline scenario, the Reserve Bank officially contemplates an even bleaker scenario that yields a U-shaped recovery. It is characterised by further outbreaks of the virus around the world and in Australia, leading to the extension of international travel restrictions until at least the end of 2021. Unemployment in this scenario rises well past 10 per cent and remains there until 2022.
Although the Reserve Bank doesn’t say so, even this “downside scenario” implicitly assumes the discovery and production of a vaccine that would enable the easing of international travel restrictions in 2022. Finding, mass producing and disseminating by 2022 an effective vaccine for COVID-19 to the best part of 7.8 billion humans, or even half that number, sounds implausible.
Understandably, the federal government and the states have been preoccupied with containing the pandemic and providing budgetary support to deal with the next few months. Their best economists are advising on whether and how to extend JobKeeper, JobSeeker and other emergency programs. They don’t have a lot of spare time to begin formulating policies now for a scenario of prolonged restrictions, including domestic and international travel restrictions.
Consider two examples. Successive governments, Labor and Coalition, actively encouraged Australian universities to bring in full-fee-paying international students as a 21st century Australian services export. They have done so, creating Australia’s fourth-largest export earner. But now they are being criticised for going too far, for being overly dependent on international students.
Our universities do not qualify for JobKeeper and there seems to be no sympathy for them in Canberra. If Australia’s borders remain closed to international students through 2021 and beyond, our universities will be decimated.
The federal government could respond by extending eligibility for JobKeeper to universities. It should also reintroduce the demand-driven system that operated from 2012 to 2017. Allowing students with low tertiary entrance scores to go to university would be an inspired policy in this COVID-19 environment. Students graduating from high school with no further qualifications will struggle to find work in a recession. A prolonged period without ever having more than a casual job is deeply prejudicial to their life chances. Giving them the option of going to university is the right policy both economically and socially.
While at it, the government should abandon the culture wars and support our songwriters and performers https://www.afr.com/politics/federal/virus-leaves-no-room-for-politics-or-ideology-20200807-p55jgq They, too, need and deserve it.But where’s the money to come from to support the economy for a prolonged period?
It’s only a matter of time before the Reserve Bank and the Commonwealth are forced to confront the necessity of a limited convergence of fiscal and monetary policy. To date, the Reserve Bank has been steadfast in rejecting the purchase directly from the Commonwealth of government bonds issued to part-finance the fiscal support needed to avert a catastrophic recession and a possible depression, as recommended by Percy Allan and me https://www.afr.com/policy/economy/how-to-avoid-a-september-cliff-edge-20200629-p5573z and others https://www.rba.gov.au/speeches/2020/pdf/sp-gov-2020-07-21.pdf
The Reserve Bank would retain its independence, remaining at liberty to tighten monetary policy if a government overdid the bond raising or started using it for pet projects aimed at re-election.
If, for reasons of political aversion to accumulating more deficits and debt, the federal government were to pull back on its fiscal support in a recession prolonged by the absence of a vaccine, Australia would suffer an economic and social catastrophe lasting a decade or more. Who and where are the smart economists meeting and working to avert that?
Craig Emerson is a Distinguished Fellow at the ANU, Director of the APEC Study Centre at RMIT and Adjunct Professor at Victoria University’s College of Business.