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Insights 16: 8 May 2020
Roger Partridge explains in the NZ Herald why the wage subsidy worked but the business guarantee scheme won't
 
On Magic Talk radio, Oliver Hartwich talks about the economic recovery lessons we can learn from Germany
 
New Policy Point: For better or for worse - How governments respond to crises

Fool me once, fool me twice
David Law | Research Fellow | david.law@nzinitiative.org.nz
As the Government looks ahead to the end of the Covid-19 public health emergency it should first look to the past for examples of how good policy intentions in a recovery can go horribly wrong.

For instance, a paper by US-based macroeconomists David and Christina Romer shows that fiscal headroom is crucial because it means countries with low-debt will experience much milder downturns after a crisis than highly leveraged countries.

Another paper by Danish economist Christian Bjørnskov looked at 212 crises in 175 countries to see what role economic freedom plays in a recovery. He assessed the quality of institutions, trust in the rule of law and relative ease of doing business and found those freedoms resulted in less pain and faster recovery times. 

We can take heart from these findings. New Zealand was fortunate to have relatively low levels of public debt before the Covid-19 crisis and in 2020 ranked third out of 180 countries in the Heritage Foundation’s index of economic freedom. 

This does not mean, however, the Government has room to introduce new regulations to survive the Covid-19 crisis. On the contrary, it should find ways to improve its institutions and cut away regulations. Likewise, while New Zealand has the fiscal headroom now to stimulate the economy, hasty implementation of expensive investment and policy initiatives risks failure – or at least unintended consequences.

History provides plenty of examples encouraging caution here.

Consider the notorious “Cash for Clunkers” scheme in the US, introduced to stimulate consumer activity after 2008. Under the programme, the US Federal Government offered incentives of between $US2500 and $US4500 to anyone trading in a gas-guzzling, older vehicle to buy a new, more fuel-efficient car. 

Unfortunately, about 60% of the funds went to folk who would have bought a new car anyway and since many environmentally-friendly cars already had subsidies to encourage people to buy them (making them cheaper) the overall consumer spending actually dropped as a result of the scheme.

Back in New Zealand, it is already concerning to see Cabinet’s recent decision to suspend the Regulatory Impact Analysis (RIA) framework due to Covid-19. That kind of decision only undermines proper cost/benefit evaluation of some of the Government’s largest looming decisions. 

Budget 2020 is coming up next week, and the Government will likely increase spending to counter the crisis. It is crucial that New Zealand’s long-term economic health is not jeopardised by the allure of quick, potentially dubious, wins.

More details are available in the New Zealand Initiative's recent report "Policy Point: For better or for worse: How governments respond to crises"
 

Why Taiwan is winning against Covid-19
Leonard Hong | Research Assistant | leonard.hong@nzinitiative.org.nz
Taiwan is one of the few countries to “flatten the curve” while maintaining an open domestic economy. Earlier this week, Taiwan only had 104 active cases of Covid-19. Even more impressive, given its geographic position, is the state only had 27 new cases on March 20.

The key to its success was early action, far earlier than many other countries including New Zealand. While most only reacted to Covid-19 after the first confirmed case (between January and February), Taiwan started its epidemic response on the last day of 2019.

Before the first confirmed case outside China was reported, Taiwan’s Centre for Disease Control immediately set up border restrictions for arrivals from the province of Wuhan. This was followed by a suite of further restrictions on both incoming and outgoing travel and strict mandatory quarantine.

Taiwan’s response was not only quick, it was highly efficient and effective. It had prepared exceptional epidemiological and health infrastructure as a key lesson from the 2003 SARS epidemic. Screening tools such as temperature monitoring, track and trace technology and protective equipment was already in place for the next pandemic.

Moreover, to ensure its healthcare system did not collapse, Taiwan mobilised greater hospital ICU capacity with 20,000 isolation rooms combined with 14,000 ventilators. With Taiwan’s population of 23.8 million, this would be the equivalent in New Zealand of 3400 isolation rooms and 2400 ventilators. Presently, New Zealand only has 520 ventilators.

It is no surprise then that Bloomberg’s 2018 Healthcare Efficiency Index, ranked Taiwan’s healthcare system in the top 10. New Zealand is just behind at 15.

In contrast to South Korea, Taiwan did not implement high-volume testing. Instead it concentrated on efficient track and tracing that utilised a nationally integrated database between the Immigration Agency and the National Health Insurance Administration in combination with GPS tracking on smartphones. Taiwan’s CDC has tracked 2761 close contacts related to Covid-19.

As a result of Taiwan’s response to Covid-19 the IMF estimates its economy will contract by 4.0% over 2020. This compares with contractions of 5.9% for the US, 7.2% for New Zealand and 7.0% for Germany.

While New Zealand appears to have Covid-19 under control, Taiwan provides lessons on what to do to prepare for the next pandemic. Taiwan was able to avoid lockdown and maintain an open domestic economy because it acted quickly and effectively because it learned from previous crises.

New Zealand must do the same to ensure the next pandemic does not catch the system off guard again.
 

When not even the shovels are shovel-ready
Dr Eric Crampton | Chief Economist | eric.crampton@nzinitiative.org.nz
There’s an old short-handled shovel hanging in our garden shed. The plastic handle has split, but the blade and shaft are fine. With a bit of work, that shovel could again be shovel-ready. But it isn’t just yet.

This past week brought news stories that really should have been tied together. The Government is readying changes to the Resource Management Act to fast-track shovel-ready megaprojects in the Government’s preferred priority areas. Meanwhile, contractors have been digging up and re-building the same bits of Transmission Gully for some time. Nobody knows when it will end.

Together, the stories remind me of that old shovel in the back shed. If even a half-built road isn’t really shovel-ready, what hope is there for the rest of the giant projects? Even a shovel isn’t always shovel-ready.

Megaprojects are risky and pinning recovery hopes on them may be a mistake. If employment is the only criteria for success, Transmission Gully has been remarkable. Workers could dig up and re-lay the same section of road forever. But as bad as unemployment is likely to get this year, there are surely more productive uses of everyone’s time.

The whole approach is taking the shovel by the wrong end. Anyone who lived through the Christchurch Earthquakes ought to remember just how bad an idea it can be to pin one’s hopes on a few anchor projects that can take years to get going.

Myriad smaller projects could be progressed if the consenting were just a bit easier.

We were rather lucky that the bulk of our home renovation work was done before lockdown. But the consenting was a hassle and isn’t done yet. Our balcony collects the rainwater that once fell directly onto the cement driveway. But, as far as Council is concerned, that rainwater can neither be returned to the driveway where it would have fallen, nor can it go to a garden sump.

If I could take the bit of bureaucratic red tape and use it to repair the handle on that old shovel, my garden sump project would be shovel-ready.

Thousands of other shovels could surely be ready to go. Easing the rules so we can all get on with our own shovel-ready projects may make a bit more sense.
 
On The Record
 
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