It must be interesting for economics teachers these days.
Whenever they catch the news, they’d probably be thinking: “This will make a great example for my next class.”
The last week has been rich in material for the classroom.
There was a discussion about “incentives”, we heard concerns about a “double-dip recession,” and we saw a Reserve Bank governor talking about the need for more “aggregate demand”.
But let’s look at some others?
Hopefully these ones will bring the textbooks to life — and help to make sense of the world around you.
What does it mean to be a good economic manager?
On Friday, the governor of the Reserve Bank of Australia, Philip Lowe, appeared before a parliamentary committee.
He told the committee it was very important for everyone in Australia to get vaccinated as quickly a possible.
He said the quicker everyone got vaccinated the less economic damage we’d incur, and the faster we could open the economy back up.
“I’ve had my first shot of AstraZeneca. I’m getting my second one in two week’s time,” he said.
It was a great example for the classroom.
Dr Lowe said the delta outbreak in Greater Sydney, and recent lockdowns in other states, were doing a lot of economic damage.
In fact, economists have even put numbers on the damage.
A couple of weeks ago, Commonwealth Bank’s economics team sent this warning to their clients:
“The extended lockdown in Greater Sydney will change the course of the Australian economy over coming months.
“Prior to this, the Australian economy was set to record a strong recovery and the unemployment rate was on track to move well below 5 per cent by year end.
“That idyllic scenario, however, has not materialised and the economy has hit a major pothole before we’ve reached the vaccine finish line.
“A deep contraction in gross domestic product (GDP) over the third quarter of 2021 is now a fait accompli.
“It is the inevitable consequence of shutting down large parts of the economy. Employment will fall and unemployment will rise.”
CBA’s economics team has estimated Sydney’s lockdowns are costing roughly $1 billion a week in lost activity when construction is operating, and $2 billion a week when it isn’t.
For the September quarter, they estimate $13 billion worth of economic activity would end up being destroyed nationally (because some states will still record positive growth).
“The rollout of the vaccine is incredibly important for the economic outlook,” they’ve warned.
Those numbers are huge.
And Steven Hamilton, chief economist at the Blueprint Institute, said the current situation would be very different if the majority of Australians were vaccinated by now.
He said the bungled vaccine roll-out provided many economic lessons.
What is a ‘false economy’?
One lesson had to do with “false economies,” he told the ABC.
A false economy is a situation in which you think an action is saving you money, but over time you end up having to spend more money than you thought you “saved”.
Mr Hamilton has been a critic of policymakers for failing last year to spend as much money as necessary, and to do whatever was necessary, to secure enough vaccines for everyone at the earliest possible moment.
In April, he warned with vaccination levels still so low, the cost of any more lockdowns this year, along with international borders remaining closed, would do a tremendous amount of economic damage in 2021.
He pointed to the example of the poor Pfizer vaccine procurement to make a larger point.
“Ordering initially just 10 million Pfizer doses, rather than the 50 million required to cover our population, saved the government around $600 million according to US prices,” he wrote in April, with his friend Richard Holden, professor of economics at UNSW Business School.
“But that’s only a tiny fraction of what our economy will lose due to the resulting delay [in vaccinations] – a false economy if ever there were one.”
‘Wastage’ is not always bad
Mr Hamilton said there was another lesson, related to false economies.
Wastage isn’t always a bad thing.
He said policymakers may have baulked last year at the idea of “wasting” money to secure as many vaccines as possible, or to build quarantine facilities, but from an economist’s perspective it would have been beneficial to have wastage in that situation.
“You could say, ‘Oh, I bought car insurance and I didn’t have a car crash, what a waste’,” Mr Hamilton told the ABC.
“But obviously the much worse situation is when you don’t buy insurance and you end up having a serious crash.
“So you might think buying eight times as many vaccines as we needed, and getting factories to actually produce them, would be wasteful.
“But because the benefits were so much greater than the costs, and because the virus has been such a risky thing, having that redundancy is not wasteful. It’s actually very prudent.”
He said it could have prevented the much larger wastage we’re seeing now, where capital is still being destroyed around the country and unemployment is shooting up again.
Economic management is about more than penny-pinching
Mr Hamilton said those types of biases (false economies, and fear of wastage) can do real economic damage, and questions about whether or not policymakers are “good economic managers” are about far more than their ability to balance a budget.
“Our decades-long obsession with penny-pinching has really bitten us in the arse,” he said.
“It’s an accounting mindset. But you shouldn’t take an accounting mindset to government, you should take an economic one, which considers a broader range of factors.”
Mr Hamilton said he didn’t want to buy into the lockdown wars between NSW and Victoria, and it did seem as though NSW had developed the capacity to keep on top of small outbreaks of the virus with its contact tracing.
But he thinks NSW underestimated the Delta strain, and given how much more infectious it is, it’s shown why earlier vaccinations would have benefited everyone in the country.
“If someone had said to me last year ‘Oh hey, next year COVID’s going to be twice as infectious,’ I wouldn’t have even thought of that,” he said, as an example of the nature of risk.
He said this experience has highlighted why it’s so important to prepare properly for different risk scenarios.
“Being stingy is not good economic management. They’re not the same thing,” he said.
“The consequences of being stingy are often minor, but in this situation the consequences are incredibly stark.”
They’re important lessons for the classroom.