Recession: How do you spend if you’re locked out?

Queensland Police set up a roadblock at Coolangatta. Picture: Scott Powick

The problem with Keynesian economics is that it was framed for recessions and depressions that weren’t caused by pandemics and the stupefying effects of territorial lockdowns.

It’s one thing for governments to, rightly, pump money into household budgets, it’s another thing to encourage people to spend it.

But what happens if they can’t or aren’t allowed to spend it?

There are two explanations for the collapse in household spending that the national accounts revealed was primarily responsible for the unprecedented single quarter economic contraction.

And this is the economic oxymoron thrown up by the pandemic that is creating a nightmare for Scott Morrison.

You can use all the stimulatory effects of demand-side economics to pump-prime people’s wallets but if businesses are forcibly shut down, it becomes pretty hard for consumers to flush it back through the economy.

The question Treasury and the central bank were posed with in March and April when framing the greatest economic stimulus package in the nation’s history was whether people would be too scared to spend any of it.

Twin concerns over health and wealth clearly undermined the confidence boost hoped for during this quarter, but the mandated frugality imposed by the states and territories killed it.

If you can’t go out to spend money on anything other than bread, milk and toilet paper — if there is any — and at the risk of arrest if you venture too far, an economic recovery doesn’t stand a chance.

In other words, in a permanent state of lockdown you can have all the money you like but if the economy isn’t producing, the recovery will be indefinitely delayed.

The imposition of a further six-month state of disaster and indefinite lockdown in Victoria could have a dangerously inhibiting effect on the ability of the federal government to map the reform process required to drive economic growth on the other side.

While the uncertainty continues — which is now being framed around liberation by Christmas — the environment for Morrison to frame the supply-side way out of the recovery becomes more polluted.

The Prime Minister had started to build this narrative around themes of industrial relations, taxation, skills and manufacturing in June.

By July, the demand-driven levers appeared to be starting to work, with the strongest growth in retail spending in 20 years.

That was before the nation was mugged by the Victorian and Queensland premiers.

The glass half-full argument is that once we get through the lockdowns, what will have been pent-up and unspent stimulus will be unleashed. Yet this requires a level of consumer confidence to be restored.

As economist Chris Richardson says, people have to be encouraged to creep out of their foxholes.

The go smart side of the go hard equation — supply-side reform — becomes harder the longer this goes on.

The more time allowed to elapse for the tribal political arguments to re-emerge, the narrower the window of opportunity for Morrison becomes.