Horrible news that more than 15% of the US workforce has filed jobless claims since mid-March is apt to be misinterpreted.
Covid-19 is also an economic shock – and we are working through an economic adjustment. This process works fastest and is seen most clearly where market forces – generating signals and guiding the adjustment process – are strong. The recovery is also likely to be stronger.
So in the US, unemployed restaurant workers generate assistance claims while they think about what to do next. More people will be idle in some other countries but it may be unrecorded and/or disguised as furlough, paid for by luckier neighbours and leaving governments with the headache of when and how to recognise the loss of livelihood.
On this basis, the US ought to give us one of the least varnished pictures of the impact of Covid and the direction in which things are trending. Moreover, the diversity of policy across the 50 US states ought to be a test bed for identifying what works and what doesn’t.
Since the incidence of the disease and its mortality is not yet completely clear, it’s too early to call the patterns of adjustment.
But speculation is permissible. And if it transpires that we are facing a fast-spreading disease with negligible mortality for most of the population and high mortality for the old and infirm, economic recovery most likely would take place on the basis of (relative) normality for most of the population, but with high levels of social isolation for the vulnerable (and the fearful).
As the sequestered vulnerable tend to be economically inactive, the financial impact here could be less than expected.
Relative normality is more complex. Perhaps it looks like normal life with less association, particularly with strangers. So less public transport, public entertainment and tourism. But also with some less obvious manifestations. For example, less willingness to try on clothes and shoes in shops or to buy second hand.
Some behavioural changes will be dictated by public health restrictions (e.g., for international tourism) but don’t underestimate how much will be the sum total of people making their own risk judgements, and constantly refining them in light of what everyone else is doing.
And don’t forget the possibility of a paradox effect – the seemingly-invulnerable young rushing to de-isolate, cheaper now and absent the cloying presence of the unattractive old.
How might New Zealand shape up in such an environment?
First, the good things.
- The NZ economy is a support system for primary production. Demand for our products should hold up better than most and supply looks less liable to disruption.
- Low public debt levels provide more scope to borrow and postpone pain (but also to avoid necessary adjustment).
- Low density population, wealth and high use of cars are naturally socially isolating.
Now the not-so-good:
- Serious losses of some valuable production (e.g., international tourism services).
- High financial gearing. The propensity of New Zealanders to put a disproportionate share of their wealth into real estate and its financing with offshore borrowing through the banking system could generate a nasty shock.
- Government micro-management of the Covid response, imposing unnecessarily costly restrictions and stretching out the adjustment and recovery period. These costs become more apparent over a longer time.
It would be foolhardy to predict which of these factors predominates over the long haul. But some things are clear. First, universal, prolonged, prescriptive social distancing is expensive. Secondly, avoiding economic adjustment could be even more so. Thirdly, those governments using their economic and political firepower too early will be more vulnerable in making the – perhaps inevitable – transition to a grinding austerity.
So be a little cautious before judging performance on short-term economic data or the perhaps-fleeting popularity of current economic measures.