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Insights 10: 27 March 2020
Read our New Research Note - Effective treatment: Public policy prescription for a pandemic
In this podcast, Dr David Law, research fellow, discusses the impact of short-time work schemes to reduce the economic impact of Covid-19
Covid-19: In the NZ Herald, Roger Partridge explains how the Government can protect households and businesses

Working for New Zealand
Dr Oliver Hartwich | Executive Director |
These are times like no other. Unless you are well over 80, you would not remember an existential and comprehensive crisis like this. We are in uncharted waters.

The disruptions of the lockdown are felt by everyone. Every family, every local community, every business, every everything. The situation is costing us nerves, sleep, jobs and money. Nothing is anymore as it was just a few weeks ago.

It takes specialist expertise to deal with the public health challenge Covid-19 presents. The science is complex. We must trust the epidemiologists, virologists and biomedical experts to guide us. Politicians are well-advised to listen to the science. Most do.

In the same way, we need specialist expertise to deal with the economic policy challenge of the Covid-19 crisis. The unprecedented and simultaneous shutdown of the world’s economies creates a maze of challenges. To navigate it takes competence, experience and judgement.

Over the past couple of weeks, our Initiative team has worked tirelessly to help devise a way out of this crisis. Working from home, and almost literally 24/7, my colleagues have jointly mapped a pathway out of this disaster. The internet is keeping us together – along with our commitment to New Zealand.

In ordinary times, we release one or two papers a month. This week, the Initiative team has published four papers on the crisis.

Each paper contains evidence-based advice on what our country must do now to get through the immediate challenges. And each enables New Zealand to quickly recover from the Covid-19 shock.

My colleague Dr David Law has looked at how we can best save hundreds of thousands of jobs over the coming months. Having worked at the OECD in Paris, David is familiar with wage subsidy schemes from around the developed world. That is why he recommends New Zealand should follow the example of short-time work allowances, which worked wonders for Germany during the GFC.

Our chief economist Dr Eric Crampton, supported by research assistant Leonard Hong, has produced a blueprint for New Zealand to manage the public health challenges, support companies over the crisis and secure Kiwi families’ livelihoods. It is already influencing government policymaking.

David and Eric also warn us in a joint paper against introducing a Universal Basic Income. Though superficially appealing, such a scheme would be expensive and would not preserve jobs. In its place, they propose to extend the student-loan scheme to everyone.

Eric has also provided a timely paper to remind the Government that during the Covid-19 crisis it should triage other Parliamentary business and put unnecessary political activity on hold.

Meanwhile, our chair Roger Partridge has advised on the constitutional and parliamentary implications of the lockdown. Behind the scenes, Roger also helped to avoid a major legal calamity in labour law.

I have done my bit to ensure that critical companies can circumvent legal obstacles to serve New Zealanders during this lockdown.

And we have been in constant contact with politicians from the government and the opposition: to pass on issues, to give advice, to prevent mistakes.

Physically separated but united in spirit, our team has done what we do best. To work towards good policy.

We cannot pretend this crisis is an opportunity. But we do believe we can help New Zealand in responding to it.

Below are the four publications released this week: Along with three major columns in the NZ Herald and Newsroom:

A better approach to hold onto jobs
Dr David Law | Research Fellow |
The Covid-19 outbreak is quickly developing into an economic crisis. A top priority for the Government now is to maintain employment and ensure firms can quickly recover when the lockdown ends.

It has chosen wage subsidies as the preferred measure to help both firms and workers. These were initially set at $585.80 per week for a full-time worker and $350.00 for part-time workers, limited to 12 weeks per employee and $150,000 per firm. The scheme is projected to be worth over $9 billion.

However, good policy is critical now more than ever and there are better ways to preserve jobs.

The Government’s first attempt is not well targeted or flexible enough and lacked a large enough incentive for the big end of town, which is responsible for a substantial proportion of employment, to continue operating in the crisis. If the Government doesn’t shift its stance on wage subsidies it risks a mass lay-off of jobs and the potential destruction of many companies.

A policy called short-time work (STW) is a superior option. It provides firms with wage subsidies to reduce their employees’ working time rather than laying them off. Here’s how it would work.

A hotel with 200 employees running at 20% occupancy needs fewer cleaners, receptionists and chefs. Under the STW, it could reduce everyone’s working hours to 20% and let the Government compensate the employees for a share of their lost income. When the crisis is over, the hours can be lifted again as the hotel’s operations ramp up. Crucially, employee/employer links are maintained.

Evidence supports STW schemes which are now common across OECD countries. For instance, at the height of the Global Financial Crisis, 4-5% of employment was covered by a STW scheme in Germany, with an average working time reduction of 28%. Estimates suggest that for every worker participating in the scheme about 0.8 jobs were preserved.

If New Zealand could achieve Germany’s STW success, employment would be 3% greater than under the Government’s present scheme, as our recent research paper outlines in more detail (available here).

Unfortunately, other bad policies are emerging. The introduction of Universal Basic Income (UBI) – a benefit paid to everyone regardless of work status – is an example. Apart from the cost of UBI (which is astronomical) it would do little to preserve the relationship between employees and employers. It may even be detrimental to employment overall.

Coronavirus decision-making needs new Act of Parliament
Roger Partridge | Chairman |
The coronavirus lockdown is a challenge for every one of us. Every worker, family, charity, public institution and firm. Workers are even questioning whether their jobs will exist when they emerge from enforced hibernation. Unfortunately, far too many may not.

The lockdown has set off a regulatory chain reaction that threatens to blow up the business world - and the jobs it creates.

Only rapid-fire decision-making can avoid a widespread business-sector meltdown.

Two examples illustrate the difficulties businesses face:
  • With incomes decimated, firms are desperate for credit. Yet the Responsible Lending Code requires lenders to be satisfied a borrower can pay back the loan without suffering undue hardship. In the midst of the crisis, how can financiers possibly do this?
  • Before taking on a new loan, directors must be satisfied their company will be able to repay its debts as they fall due. Yet without a crystal ball, they have no way of making this assessment.
Those are just examples of laws that are now obstacles to businesses trying to stay alive during the crisis. Over the last week, The New Zealand Initiative has collated a small library of similar concerns and relayed them to Finance Minister Grant Robertson at his invitation.

If the Government wants business to survive, it needs a decision-making mechanism to unblock this myriad of regulatory obstacles.

Unfortunately, the Epidemic Preparedness Act 2006 is not that tool. While the Act contains many special powers, its requirement that a regulation or restriction is “impossible or impractical to comply with” is ill-suited to resolving regulatory obstacles facing business. Neither of the examples above would trigger the “impossible or impractical” test. The problem is not that firms cannot comply with the rules. The rules are simply unsuitable for the circumstances.

Some regulatory problems can be mitigated by enforcement agencies. The Commerce Commission set a good example this week stating it will not enforce coronavirus related breaches of the Commerce Act. But this approach still leaves firms exposed to lawsuits from third parties.

The Government needs a new, targeted, flexible decision-making process to suspend or modify obstructive regulations, including those enshrined in statutes. The power should be limited to issues arising from the coronavirus crisis. It should also be subject to scrutiny – and possible veto – by the new Special Committee of Parliament. And it should have a sunset clause.

To avoid economic rigor mortis, Parliament must be recalled urgently to pass the necessary enabling legislation.

On The Record
All Things Considered
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