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Insights 14: 24 April 2020
New Research Note: Deficit spending in a crisis: why there is no such thing as a free lunch
Dr Bryce Wilkinson talks to The Financial Times (US) about how much it should cost to contain a pandemic
New Research Note: Lessons from abroad: South Korea's Covid-19 Containment Model

Seven principles for recovery
Dr Oliver Hartwich | Executive Director |
How do you get an economy going again when entire industries are destroyed? How do you encourage private consumption when families are trying to make ends meet? How do you run a government when public finances are in disarray?

These are the questions that will also be on the minds as New Zealand parliamentarians today. But just imagine how much more intimidating your task would have been in Germany in 1945.

There were many people who believed back then that a government-run recovery would be the way forward.

Practically in the whole of Europe, governments took the lead in planning for their nations’ recoveries.

Not so in Germany. Because Germany had a group of economists around Ludwig Erhard.

Erhard knew that Germany would only recover if the recovery grew from the bottom up. It could not be planned for by the government. And Erhard knew that it would only be a recovery deserving its name if it brought “Prosperity for all”.

“Prosperity for all” was more than a slogan. It was more than the title of Erhard’s famous book. It was the essence of Erhard’s policies.

Economic policy is not about propping up some big companies. It is not about preserving the privileges of the few. It is not about the government picking winners and controlling the economy.

No, the ultimate goal of economic policy is to bring hope and prosperity to all people.

Ludwig Erhard achieved this. Under his leadership as economics minister and later as Chancellor, the country experienced a boom like never before. It was a true economic miracle.

So, you may now wonder what was Erhard’s miracle recipe? What did he do to turn the ruins of an economy into an economic powerhouse? And what can we, in New Zealand, learn from this?

The truth is: there was no miracle formula. Erhard did not micro-manage the economy. He did not control individual industries. He did not print money to finance his projects. Nor did he pay favours to any businesses.

Erhard followed a principles-based approach, which he called the “Social Market Economy”. And that is the approach I recommend to New Zealand today.

Erhard’s friend and economist colleague Walter Eucken distilled seven principles of the “Social Market Economy”:
  1. A functioning price system
  2. Monetary stability
  3. Open markets
  4. Secure private property rights
  5. Freedom of contract
  6. Liability for one’s actions and commitments
  7. Steadiness of economic policy
Each of these seven principles is as relevant to us today as it was in 1945. If we follow these principles, we can build New Zealand’s recovery and bring prosperity to all New Zealanders.

This is an edited extract of Dr Oliver Hartwich’s speech to the New Zealand Parliament’s Epidemic Response Committee. Read the whole speech here.

Lessons from South Korea: Looking 40 days into the future
Leonard Hong | Research Assistant |
South Korea has quickly become a model country for effectively containing Covid-19 without needing a national lockdown.

Given that the liberal democracy of South Korea is 40 days ahead of New Zealand on the epidemiological curve, it offers important lessons on how to balance an increase of economic activity with continued efforts towards virus elimination as New Zealand leaves Alert Level 4.

Despite the initial outbreak of the Shincheonji cluster in Daegu, South Korea has successfully ‘flattened the curve’ in its second phase.

Its robust ‘all-of-government’ attitude and deep coordination between the private and public sectors was boosted significantly by its experience with the MERS epidemic. That virus in 2015 taught the South Korean government it needed better medical infrastructure to deal with future pandemics.

This time around, South Korea implemented early and effective contact tracing made possible by its advanced digital infrastructure. Taking only 10 minutes per person to complete the test, South Korea’s contact tracing is now among the fastest in the world.

And it has conducted a lot of tests. With a combination of various drive-through and walk-through testing clinics, managed by its centralised public health care system, the East Asian nation has the capacity to do 20,000 tests each day, and has already conducted about 580,000.

Yet it still managed to facilitate a relatively open economy. It did this by sending teams to fumigate and disinfect public spaces while the government encouraged the use of face masks. Both measures have been widely lauded as key in preventing rampant community transmission.

The Korean governments early response to the outbreak, made possible by its own diligent lessons from previous pandemics, meant the country largely avoided a public health and an economic catastrophe.

President Moon Jae-in’s administration proved to be transparent with excellent and open communication to citizens which helped solidify great public cooperation and compliance to get the job done.

As New Zealand opens its economy a bit more next week, possibly down to Alert Level 3, it can learn from South Korea’s success. The Government must ensure it has rapid contract tracing and continue with high-volume testing while Kiwis continue to carefully comply with lockdown rules.

If South Korea is a model for what New Zealand can expect 40 days from now, then the Government should pay attention to avoid exacerbating the public health and economic catastrophe.

You can read our new Research Note: Lessons from abroad: South Korea's Covid-19 Containment Model here.

Media Funding
Eric Crampton | Chief Economist |
Last week, the diligent Epidemic Response Committee was swarmed by a gaggle of head-honcho media types each making their case for a handout.

Plenty of other sectors had their time before the committee, but in hour-long slots before being bumped off by the next sector spokesperson. Only the media got to dominate an entire session. I guess that’s the power of owning the megaphone.
Only those living under a rock don’t know the media is struggling financially. But what about other dying industries? They don’t have a megaphone. The world has moved on from them, too. Shouldn’t they get some support?
Media is a bit different than a normal business. While there was never any public interest in propping up the buggywhip-makers against the onslaught of the automobile, there is a public interest in the existence of credible and rigorous journalism.
The problem is that too few seem willing to pay for rigorous reporting for enough of it to be produced. The loss of classified ads and the resulting dip in revenue are both symptoms of that real underlying issue: there is no particular reason for people to pay attention to current affairs.
And it gets worse. If we think the market doesn’t provide enough healthcare, the government can boost its funding. Yet since one of the main benefits of rigorous journalism is to watch over the government, public subsidy might come with dangerous strings.
How then to fund the news?
In other places, rich weirdos own newspapers – sometimes out of public-spiritedness, sometimes as vanity projects. We can imagine the fun if Bob Jones bought one of the media outlets, Gareth Morgan bought the other, and both used the space in their daily editorial sections to slag each other off. That would at least be entertaining.
But we can imagine other alternatives too.
Some commercial radio stations encouraged people to listen by running regular lotteries. They’d dial up a random phone number and if the person answering could name the last song played by the station, the lucky listener would get a hundred dollars.
Perhaps the government could set up a $36.5 million budget line for prizes. Every day, one lucky Kiwi gets the call. If they answer that day’s question about the key events of the week – with the different news editors supplying the questions – they win that day’s $100,000 prize.
It’s a lot cheaper than other kinds of bailouts. And it could encourage people to start paying attention.

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