Coronavirus: We can win this war — and avoid an economic defeat

With the toll from the coronavirus declining to very low levels, Australians need some clarity about the path back towards normality.

To say that is not to declare ­victory. The localised outbreaks in Tasmania highlight the dangers of transmission within the community. And it is undeniable that vulnerable groups — including elderly Australians and those with compromised immune systems — would face serious risks were the infection allowed to spread.

It is, however, also undeniable that the costs the restrictions impose are staggeringly high. Although estimates vary, merely extending the restrictions by another two months could permanently reduce gross domestic product by $95bn, almost equal to a year’s public spending on education. The decline in what economists call “welfare”, which adds to the GDP cost the losses consumers and producer incur when they are prevented from engaging in mutually beneficial trades, would be even larger, taking the total to about $130bn.

And the longer the restrictions remain in place, the higher those costs become. Already, many firms are incurring debt burdens they will struggle to repay, hampering their ability to expand in the good times and increasing their risk of failing in the bad.

Moreover, as the financial position of ever more firms worsens, the jobs displaced workers once had will vanish, condemning hundreds of thousands to the misery of long-term unemployment.

The steep rise in public debt to reach almost half of GDP makes all those problems more acute.

Yes, even that level of indebtedness is low compared with the average for the advanced economies. And yes, the cost of servicing that debt is small at today’s near-zero interest rates.

But Australia’s economy is almost uniquely exposed to large terms-of-trade shocks, which fiscal policy can cushion only if our public sector balance sheet is strong enough to ride out periodic collapses in commodity prices.

And while the costs of servicing public debt are manageable today, it would be dangerous to assume real interest rates will remain close to zero forever.

Rather, with the International Monetary Fund expecting the governments of the advanced economies to more than treble their aggregate borrowing this year alone, there must be a risk that interest rates will be forced up by competition for scarce savings or — if central banks fund the debt by doing what amounts to printing money — by the fear of inflation.

As a result, even were the restrictions entirely removed tomorrow, future generations would inherit a significantly increased debt burden and a seriously depleted capital stock to help them pay for it.

Of course, the restrictions won’t be entirely removed tomorrow, nor should they be. But that hardly means they ought to continue until we go for weeks without new cases.

There are, for sure, some diseases so devastating that it is sensible to aim for their complete eradication. Ebola, for example, is extremely contagious and highly lethal; equally, polio savages young lives, inflicting suffering no community should tolerate. Eliminating those diseases from the risks Australians need to fear is as desirable as it is feasible.

But now that its behaviour is relatively well understood, no one could seriously claim that the coronavirus falls into that category.

On the contrary, even were we to imitate Sweden, which has imposed few restrictions and whose overall standards of population health are closely comparable to our own, the death rate from COVID-19 would be less than half the fatalities we experience each year from pneumonia.

And with the capacity of Australia’s hospital systems to deal with the most serious cases having been more than doubled, we can have much greater confidence than we had three months ago in our ability to manage the virus’s presence in the population, so long as it is properly contained. It is therefore time to look at low-risk options that would ease the burden on firms and on ordinary Australians.

Reopening schools, as is being done throughout Scandinavia, provides an obvious case in point. But there are also plenty of others.

For example, why shouldn’t families — whose members care deeply about each other’s health — be permitted to get together, as South Australia proposes to do?

And is there really any reason to keep museums and major ­libraries — which are fully capable of enforcing social-distancing rules — locked up?

Finally, couldn’t the states and the commonwealth rapidly devise a scheme that allowed restaurants, coffee shops and other workplaces and retail outlets to reopen so long as the public health authorities certified they had implemented stringent mechanisms for limiting transmission risks? That measure alone could almost halve the costs of the restrictions, without jeopardising the success that we have achieved to date. Unfortunately, identifying areas such as these is not the obstacle that prevents a gradual transition to a more targeted approach; rather, the roadblocks are pre-eminently political.

The number of cases and fatalities is easily observable; the economic harm imposed by the clampdown is not, and is further obscured by torrents of public spending. The premiers are therefore entirely focused on that single indicator, all the more so because they know that the vast bulk of the fiscal costs will fall on the ­commonwealth.

As for the Morrison government, it is naturally reluctant to proceed without the strong support of the states. It learnt from the bushfires that managing crises in a federation requires many hands working together, not cutting each other’s throats. And it knows that if it relaxed the restrictions without the premiers’ endorsement and then had to backtrack, however slightly, it would have a high price to pay.

We are, as a result, far more likely to make the error of prolonging the restrictions even though the incremental gains are well below the additional costs, than we are to make that of easing them prematurely. Perhaps that is what Australians, who are naturally affected by the media focus on worst-case scenarios, want. But the conse­quences will not be solely economic.

It is not the irksome abuses of police powers that are especially worrying. Rather, it is the fact the longer the restrictions remain needlessly in place, the greater is the likelihood that we will emerge from this pandemic with an economy so severely weakened that it can survive only by clutching to the life raft of public spending.

That will not just compromise this country’s prosperity; it will also provide a breeding ground for the politics of rent-seeking cronyism and corruption, making the turmoil of the past decade seem like a golden age.

If that is the fate that awaits us, the virus will have triumphed ­beyond its wildest dreams.