If a downturn stems from something in the real economy, rather than something messed up on the monetary side or in finance, we need to think about Real Business Cycle models.
What are the stylised facts of the current mess, at least for NZ?
- Massive negative technological shock across a broad range of sectors meaning that existing combinations of labour and capital are far less productive than they once were. Restaurants need more space to accommodate the same number of clients, or fewer clients in the same space. Factories, meatpacking plants, and offices need more spacing between workers. Some of this shock will be temporary - we will eventually get to Alert Level 1. But even then some of the shock will be longer-lasting: the international arrivals lounge will be very different when folks coming in from Covid-places have to shunt over to a quarantine facility and have to be kept separate from those coming in from Australia.
- A collapse in tourism that feels a lot more like a huge negative price shock to an export commodity than it does like any domestic aggregate demand problem. If world milk prices dropped by 95%, we wouldn't dream of trying to solve it with domestic "drink more milk!" campaigns.
- Supply chain issues that also feel like a negative tech shock.
- A shock to work arrangements for office types now more able to work from home; many of us will take advantage of it for as long as possible, with consequent effects on demand for lunches in town. This isn't a normal kind of AD shock - just giving people more money wouldn't increase demand for lunches in town when people prefer to work from home and are now allowed to do so. Some of this could persist for a long time if firms have discovered that a lot of workers are no less productive when working from home and prefer working from home.
- Jump in unemployment consequent to all of that.
- Oh, and a massive drought in some dairying parts of the country - the exemplar RBC shock.
- Shifts in consumer demand to online.
Am I missing anything there? None of that would argue for accidentally contractionary monetary policy - RBNZ needs to keep us within the inflation bounds.
But this is way different from the GFC. We could yet get GFC messes out of Europe, but I don't think we're there yet. Fingers crossed. The underlying problem is a massive terrible tech shock. And that puts us into RBC land.
What do you do in RBC-land to get out of the mess? You don't tell firms to run four-day work weeks! Rather the opposite: you should be looking for ways of removing labour market rigidities to make it easier to adjust! Fortunately, things already are pretty flexible here. Vodafone retrained and redeployed retail centre staff to be chat assistants for online customers for example. That would be impossible in some places due to rigid work role definitions. Remember that episode of Community where they couldn't get a bulletin board replaced because of union job definitions?
Sure, there's a quasi-Keynesian role that would be played by income support measures. And I still like the idea of letting non-students access the student loan system. But the underlying problem is supply, so we need to figure out how to let supply adjust to the temporary new normal, and to the longer term changes.
A short potential list:
- Sorting quarantine at the border to start letting visitors back in. It wouldn’t fix all of the problem, but international students would come back real strongly – us and Oz would be the only places going able to offer a normal university experience. It just blows my mind that they haven't sorted this out. It isn't just international education that's an opportunity here. Anything else that could relocate and that depends on not being disrupted by Covid - is it that hard to imagine international sporting codes shifting to here and Oz to keep up the TV revenues? Film and tv - they're looking at no filming for a while over there. What else? I don't know, and that's the point: set the quarantine rules and facilities on a user-pays basis and then let folks come in subject to quarantine and testing. Entrepreneurs will be the ones to figure it out, rather than boffins designating new classes of allowed entry. Instead of the America's Cup people lobbying to get in, they'd just need to have sorted out quarantine for their arrival.
- Lengthening school days and shortening school holidays so the kids make up for lost time and so the parents have an easier time working longer if they want to. Everybody hates this idea when it's pitched this way - imagine it instead as a proposal for free after-school care with enhanced learning outcomes and educational holiday programmes. Does that make it sound better? I really enjoyed the couple months home with the kids and expect they learned more than if they'd been at school. That won't have been the case universally. Lots of kids will have fallen badly behind.
- Reducing rather than increasing holiday entitlements or stat holidays. I know that won't fly, but we at least shouldn't be increasing things. Egads. I still think it would be a good idea to deal to the Easter problem though.
- Checking what bits of labour market reg could be abated, even temporarily, to make it easier for everyone to adjust
- Easing consenting regs to make it easier to do things. The Auckland Unitary Plan is like six thousand pages. Germany’s planning guide for the whole country is 500 pages, with 100 pages being the actual rules and the rest being references and explanatory notes. We know that rigidities in land use planning are making a mess of things. Peter Nunns put figures on it a couple years ago. Ease them! If someone wants to make a bet that demand for downtown office space will be permanently lower and wants to convert an office tower into apartments, zoning shouldn't get in the way of that right?
- Ease access to capital to make it easier for firms to finance their response – the Overseas Investment Act changes look to make it harder instead.
Anything else I'm missing?
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