The Joe Walker Podcast - How To Put The Economy Into A Coma - Chris Edmond & Steve Hamilton

Episode Date: April 1, 2020

Chris Edmond and Steve Hamilton are Australian economists.Show notesSelected links •Follow Chris Edmond: Website | Twitter •Follow Steve Hamilton: Website | Twitter •'A Rush Back to 'Normal' Would Be the Blunder of the Century', WIRED's interview of Larry Summers •'Impact of non-pharmaceutical interventions to reduce COVID-19 mortality and healthcare demand', Imperial College London paper by Neil Ferguson et al •'How the recession we have to have can be sharp but short', The Australian Financial Review article by Steve Hamilton and Stan Veuger •'Coronavirus: payroll subsidy will save the economy', The Australian article by Chris Edmond and Bruce PrestonTopics discussed •What happens to an economy when non-essential workers are told to stay home? 9:22 •The false choice between health and economic outcomes. 20:53 •How long do lockdowns need to last? 36:39 •Are Australia's lockdowns hard enough? 43:46 •What does pandemic-appropriate fiscal stimulus look like? 46:29 •Is this the end of surplus fetishism? 59:45 •JobKeeper. 1:06:44 •Will Australia see further rounds of stimulus? 1:19:21 •Is the financial economy healthy? 1:22:33 •Which one piece of advice would Steve and Chris give to the Australian Government? 1:26:26See omnystudio.com/listener for privacy information.

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That's www.blinkist.com slash swagman. Try it out. Make the most of your lockdown. You're listening to the Jolly Swagman podcast. Here's your host, Joe Walker. Ladies and gentlemen, boys and girls, swagmen and swagettes, welcome back to the show. I hope you are all doing well. Welcome to this special three-way podcast. Now, listeners of this podcast will know that normally my episodes are like big set pieces where we go in-depth with a single guest about his or her ideas. But given the varying lockdowns most of you listening will be under right now, I thought we could buck that trend with an emergency

podcast about how our governments should keep the economy alive and ready to rebound with the right fiscal stimulus. Altogether, I want to explore how our governments can put our economies in a coma. This episode was recorded on the evening of Tuesday, the 31st of March, Sydney time. We have two guests. The first is Chris Edmond, a professor of economics at the University of Melbourne, and the second is Steve Hamilton, an assistant professor of economics at George Washington University in Washington, D.C. Both Chris and Steve have been leaders in the public debate about how the Australian government's fiscal response to this corona crisis should evolve.

Two caveats before we begin. Number one, this conversation is parochial. It is very Australian. So I do apologize to my listeners overseas, whether you are in the United States, England, Germany, or Canada, or elsewhere. However, there are still some issues of general interest that we discuss. For example, the logic of lockdowns and what the correct fiscal response should be in this pandemic.

Secondly, we were talking over Skype with video and there was three of us during a lockdown when everyone else is using the internet. So, at times you will hear some Skype noises and hiccups. I apologize for that. We tried to keep that to a minimum and edit out as much of that as possible, but it won't be perfect. Hopefully, it's not too distracting. I don't think it is. So, without much further ado, please enjoy this conversation with Chris Edmund and Steve Hamilton. Steve Hamilton, Chris Edmund, welcome to the show. Great to be here. This is a very special recording of the podcast because it's the first time we've had two guests at the same

time and it's a perfect opportunity because you're two Aussie economists who've been working hard to move the needle in terms of the Australian government's fiscal response to this unprecedented pandemic. We're going to discuss all of that and more, but first I thought we should begin by enabling people to attach a voice to a name. So, I'll ask each of you to do three things. Firstly, introduce yourself. Secondly, tell us what you do or what your title is. And then thirdly, just give us a very, very brief outline of your involvement in the coronavirus issue. So Steve, why don't we start with you? G'day, Joe. I'm Steve Hamilton. I'm an assistant professor of economics at George

Washington University, which is in Washington, D.C. So my office is about five blocks from the White House. I've been there a couple of years. I did my PhD at Michigan from Queensland originally, and I worked at Treasury in Canberra for a few years before that. So I kind of looked at the coronavirus disaster unfolding from D.C. and I kind of noticed that a lot of people weren't, a lot of economists, and this was only three weeks ago, by the way, it seems crazy, but a lot of economists didn't seem to be taking it sufficiently seriously. And a lot of the dialogue that I heard, um, widely, you know, circulating among

economists, I thought was not the right framing and, and a lot of the policy recommendations weren't the right, they were for the wrong kind of situation. Uh, and so I just started tweeting like crazy about three weeks ago. Uh, and you know, a couple of people noticed the tweets we wrote some opinion pieces um and uh it got a lot of traction and and people paid attention and then since then i've just built up a bit of a head of steam trying to you know push things in the u.s first and then coming back to australia a week ago trying to push things here and chris? So I'm Chris Edmund. I'm a professor of economics at the University of Melbourne. I've been there for a bit over 10 years.

Before that, I was at New York University in the U.S., did my PhD at UCLA. And long, long ago, I was in the research department at the Reserve Bank, briefly. Also a Queenslander like Steve, but yeah we have the same we have the same background yeah it's very similar background um i i haven't been uh as active on the corona economics front as steve i've had an op-ed that came out in the australian uh yesterday that took a while to come out so um yeah i've been much less productive than steve but

i think we've been arguing very similar things uh i was going to say that on the timeline that that steve laid out i mean it is true that obviously things have been you know really only intense on the economics front for maybe a shorter period of time than you would like but i think things were moving faster in australia than they were in the US. So when you get that timeline, I think that was laid out, was more like a US centric timeline. I think, I mean, I'm not saying that things moved as fast as they ought to have moved, but they were moving more quickly. There was more appreciation of the economic significance a little bit earlier. I want to give everybody listening, including myself, a crash course in Coronanomics 101. And I want to ask you guys, you know, I want to step back

and ask you guys some naive questions. And you're the expert, so feel free to slap me around the head and reframe any of the questions if you need to do that. So, the first thing is just to start with a broad history of the closures of Australian life. So, the first thing we had was on Monday, the 16th of March, when events of 500 people or more were banned. Then the following Monday, on the 23rd of March, Australia from 12 p.m. Australia closed its pubs, clubs, gyms, cinemas and places of worship with restaurants and cafes switching to takeaway only. Obviously, as of the last few days, we've had even more drastic restrictions put in place in terms of people gathering in groups, groups of more than two, a band in New South Wales and Victoria,

and people are essentially only allowed outside for exercise, essential shopping, or work and education if they can't do those remotely. So, my question is, what happens to an economy when all non-essential workers are told, stay home? Chris, maybe we'll start with you. Well, I mean, it inevitably leads to a large reduction in the amount of economic activity that can be done. They're just going to have some sense of it. So ballpark, about 1.4 million Australian workers are in occupations that are directly shut down, right, that are essentially prohibited by government fiat, right? So that as part of the public health response, these activities will basically be impossible. There's a large reduction in the amount of labor activity, labor supply that is being done. And then it's basically unavoidable as part of the public health

response. That is to say, if you accept, as I do, and I think most economists do, the need for pursuing some very stringent form of social distancing as part of the public health response, then you have to accept that in the next few months, and we can talk about exactly how long this might be, we inevitably have a reduction in the amount of work that is being done, and it's a large reduction. And so because of that large reduction in work, there is no escaping that there is going to be a relatively large reduction in economic activity. One of the largest reductions in economic activity as conventionally measured. And we can again talk about like how some of those conventional definitions may be a little bit hard to interpret given what we're about to go through. But there's going to be a large reduction, and probably

it would be normal for that large reduction, because of that direct shutdown, to, in a sense, spill over to many other kinds of economic activity. So by some accounts, roughly another million people, so a little bit less than 10 percent of the labor force are in occupations that are you would anticipate taking a what you might call like a second round effect from the reduction economic activity that's triggered by the first round that is to say the kind of the direct um, the direct closures. So between that first and that second round, that is a lot of economic activity that is potentially disrupted. And the way I see the kind of the role of policy is as keeping the loss in economic activity to the minimum, right?

To kind of like mitigating the downturn as much as possible. So this is not a classic, we just want to eliminate the downturn because that's basically impossible given the need to achieve the public health response. But there's still two components to the downturn. There's the part that's like warranted by the circumstances, the part that's a necessary part of the public health response. And there's the part that is triggered by the impending collapse of incomes for those who do have to work less. That's what you worry about. And so

all of this kind of discussion of the fiscal policy response is really couched in how much of this loss of economic activity can we mitigate without compromising public health goals. Got it. So to say, we want to support people's incomes, for example, so that people who may be inactive in the sense that they're staying at home are still spending, they're still buying their groceries online, they're still paying their rent, they're still doing as much of their normal economic activity as possible. So the overall, the kind of the reduction in economy-wide economic activity is as little as we can get away with. That's kind of

like the bigger picture where that I sort of see the situation. So some inevitable loss that is part of the public health response, we want to make it be no more than that. The thing that's strange about this situation is, you know, in a typical recession, you don't get entire industries that go from one to zero Mmm, that's true. It is like a really weird thing, right? It's like it's usually more evenly distributed through the economy here well, this white's gone No, no, you can I was gonna say well

It is kind of like why then some people sort of analogize it to a to a natural disaster Because it is a little bit like what you get in a localized sense in like like when there's a flood right where things just go to zero but it's like we're getting that for large chunks of the economy but these things going to zero is very unusual yeah whole industries sectors that have this in you know human interaction element to them going to zero it's the fact that they're going to zero so quickly yes the sudden stop aspect is is extremely important unprecedented right i mean that's never happened before i mean literally well it's more

like what you see in like developing economies when there's a sudden capital stop and you get get like these huge crashes so no i mean there's literature and international economics on sudden stops and it's precisely driven by this kind of phenomenon so you see some emerging market that's been very very dependent on imported capital and that capital turns off and you get a sudden dramatic smashing of the economy yes um and this is more like that except that instead of it being economy-wide in the sense that every sector is feeling it sort of uniformly, it's super, super concentrated in certain sectors. It has ramifications throughout the whole economy. Yes. And the other thing I would add is some sectors – so the next dimension is that there are some sectors that are doing brilliantly well.

Some sectors have this explosion in short-term demand, like Woolies. You can think of heaps of industries that are being pumped at the moment. Anything Amazon, anything that's online, anything that people are going to substitute away towards in this kind of environment. And that's creating these huge shortages and problems in that area. So it's a really, to me, it's a really unusual situation. And I think one of the things that I kind of hammered, and I think Chris alluding to it by by talking about two parts of demand is i think one of the things that i noticed a lot of people were pulling out the the macro textbook and thinking about this like a normal recession right um thinking about this like 2008

all over again right uh but the economy is is just not experiencing anything like the economy experienced in 2008. And so you can't – if you're not thinking clearly, if you're not careful and you don't think about all of these strange aspects to this recession, you'll choose the wrong policy choice. And that, for me me was the big problem. The big implication of this strange recession is that it calls for a very different response to what we would normally use in a normal recession. So that's kind of an important implication. A lot of people could think this is semantics. Is it a normal recession? Is it not? You know, is it a supply reduction? Is it a demand reduction? Blah, blah, blah, blah.

It's not just an academic discussion. It completely determines what the government should do to fix the problem, right? So, yeah. I kind of agree and kind of disagree at the same time. So, I mean, I know exactly what, I mean, I think at the end we get to the same place, but the way I think of it is like there is a part of the problem that is which is like the excess fall in output that you

might get because of a collapse in spending and a collapse in incomes. And that looks more that that second component, which is like the additional fall in output over and above that that is kind of warranted by the public health situation is more normal and i mean i think if you analyze the problem correctly you can say look i want to think about these two components of the problem and i want in some sense can i'm simplifying slightly but in some sense i want conventional measures to attack one part of it which is like like the excess fall, the so-called output gap, and the other part to think about policies for mitigating the fall in natural output, like the part that's warranted by the public health response. So, Chris, an example would be, you know, you don't want, so if you think of a family like that family is because of the the measures can't

go out and go to a restaurant right they can't go to a cinema you know they can't do all of these things there's a huge slice of their budget which they they would normally spend on a whole bunch of activities and they can't anymore right so that that element of demand should recede, right? The bad bit would be if that family lost their job, right? And they couldn't put food on the table, right? We don't want that bit. That's right. So that's the bit that I think it was being the excess for, the part that is the unwarranted or the inefficient.

Yeah, like a normal recession causes unemployment. And this recession is gonna cause unemployment. Both of those things normal recession causes unemployment, and this recession is going to cause unemployment. Both of those things we want to deal with, right? Yes. We'll return to the actual nature of this beast, but first we need to talk about the extent and duration of lockdowns and the necessity of lockdowns, because I think that's going to frame the rest of the economic questions we consider. And I want to quote Larry Summers in a recent interview in Wired magazine. So this is Larry, quote, the framing in terms of the adverse economic consequences of our policies versus the adverse health consequences of our policies confuses the economic consequences of our policies with the economic consequences of the virus. Look at what's happening in New York City. Within a very short

period of time, we would all be social distancing out of fear, not because of a law, end quote. So, essentially, what Larry's saying there is that public health or the economy is a false dichotomy. And if we just let the virus burn through the population, or if we opted for a merely mitigatory strategy, the mass deaths those strategies would lead to would cause a kind of partial rolling fear and community-driven lockdown anyway. So the true counterfactual to suppression isn't the economy does great but health outcomes are bad, but it's actually probably the economy does poorly and health outcomes are really bad as well. Steve, can I get a reaction from you yeah so this is this discussion has been going crazy over the last week right this yeah is this a trade-off or not um so in one sense um like i agree with larry like that's a true point but we i don't know what the consequences for the economy would be of these deaths right right? And a lot of people have said,

I mean, there's all these competing arguments. These people aren't, most of these people are not employed, you know, they're retired, blah, blah, blah, blah, right? For me, it's a moral question. It's simply unacceptable to have millions, I mean, millions of people die of this thing when we could have prevented it, right?

So putting the economic question aside, the lockdown's justified just to limit the damage that comes from prevented it, right? So putting the economic question aside, the lockdown's justified just to limit the damage that comes from this disease, right? The fact that when you have health systems overloaded, if you have a car accident, good luck. You know, like these are just a simple, on a simple moral level are unacceptable. So to my mind, we don't really need to make the economic argument. But unfortunately,

there are people who are saying we should, you know, let everything go, maybe aren't convinced by the moral argument. And therefore, Larry has to step in and say, well, actually, even on your terms, even on your terms, it's worse, right? Which is, it's not like the economy is going to do just fine when this thing is burning its way through the population. And I think that's legitimate. Now, the last thing I would say about that is, you know, there is a sense of trade-off. And it's not like there isn't a trade-off between economic activity and stopping the

virus, in the sense that, like, we could make the lockdown way more extreme than it is even now, right? I mean, we could. I mean, at the moment, you're allowed to go and get your hair cut. We could just ban haircuts, right? And banning haircuts would lead to fewer deaths, right? 100%. Some probability of death would fall. And we're not doing that. So it isn't even a choice between lockdown and no lockdown. We are choosing an interior point here, right?

And so we are making a trade-off between how much economic activity we're willing to restrict and how many lives or to what degree we're willing to control this, flatten the curve or control the spread of the virus. and and to my mind the trade-off that we're achieving at the moment is pretty good one right it seems acceptable um it's necessarily crude like we could probably target it in a better way you know we could design these things better but you know human behavior isn't is not easily controlled so they have to sometimes go much further than they otherwise would to try and get people to pay attention, right?

But to my mind, so I would say the outcome we have is to my mind, it seems pretty close to optimal in terms of the trade-off. And I agree. I think that it's unacceptable to have that kind of scale of loss of life, the collapse of the health system, the kind of triaging that is happening in places like Italy and Spain and soon will be happening in the US. And I think you can make the argument on that basis. I agree very strongly with Steve. I think that, first of all, morally, it's kind of repugnant to think that you're going to let people die because it would be disadvantageous to the economy to not take more intensive

measures. I kind of also feel like the economics is very, very clear that it's a false economy, so to speak, almost literally, to think that of do better uh in the short run by kind of having like looser restrictions only to let this thing burn through i mean everything that we're seeing so suggests that the kind of health capacities of the kinds of economies that we're talking about do get overwhelmed right i mean maybe hypothetically if we had like infinite health resources you could kind of think about an economic argument that was a little bit more like up for debate but like given

the kind of capacities we have in the health system and you only have to talk to anybody in the australian health system and we're not under the same kind of stress as they are in the u.s other places to know just how nervous people are about how bad things could be maybe things looked a little bit better in the last couple of days, but like up until a couple of days ago, people were extremely, extremely nervous about what the Australian system would be able to cope with. And I think, you know,

it's just, I think it's the economics completely confused to think that the economy would look better with tens of thousands of people you know seriously ill forget about deaths in some sense just think about the entire your system kind of clogged up with people i mean it's not just like deaths no deaths it's like people who even who survive and recover you know can be impaired they can be out of the economy for long periods of time i mean yeah you know yeah it's

it's not frankly just to be clear it's it's nonsense anybody pushing that that view is not i mean in that sort of you know along that conduit now i agree with you i agree with steve here as well that that there are dimensions of trade-offs it is a quite multifaceted problem and you can think that at the margin you know should we be putting more effort into, you know, a slightly tighter lockdown? We can talk about that. And, you know, are we willing to kind of, you know, play with that margin? Should we be putting more resources into testing, you know, people who aren't that symptomatic versus people who are symptomatic? There's, and that's partly a public health question, it's partly an economic question. It's like and that's partly a public health question it's partly an

economic question it's like is this where we should be putting resources if we have to kind of move you know onto that direction um so there are kind of questions there big picture it's just this is not it yeah this is not a hard and i think the problem with this i mean even if we go back to the deaths i think you know unrestricted i mean i keep thinking of the us just because that's where that's where i live and well everything has been in that context but just divide everything by 15 i think it's about the relevant comparison um but you know you let this thing go crazy in america and it's millions of people dying yeah like millions yeah it's like millions right so someone can say let it go but let me tell you any

politician who starts seeing hundreds of thousands of people dying is going to hit the brakes really hard exactly right and so if that's the realistic scenario we're talking about when we're operating in a system with politicians right then do it as soon as you possibly can. It's inevitable that you are not going to withstand those kinds of body counts, right? Yes, exactly. And the later you leave it, the worse it gets, right? It only gets harder to leave it. Yeah, absolutely.

Yes, yes. You're going to do it. Yeah, I could not agree more. I want to underscore a couple of points that were implicit in things you both said, Steve and Chris. One is that i also fundamentally reject the sociopathic it's just the old people who are affected kind of take like these are our parents our grandparents our neighbors we judge a society by how well it treats

the most vulnerable and just because someone's old is no excuse to leave them behind but equally to think that this is just a flu for young people is also wishful thinking the fatality rate is about an order of magnitude higher than the flu and then of course it increases non-linearly as a health system is overwhelmed the second thing is we may be picking up pennies in front of steam rollers if we opt for for what's being characterized as the herd immunity strategy because we have no longitudinal data on this virus and we don't know what it can do to people's organs in the long term. So, it's very dangerous. If you opt for allowing it to burn through the population you've potentially done something

irreversibly harmful absolutely so it's a kind of a clear case where there's like a like an asymmetric loss right like the consequence of getting that calculation wrong like even even in like the most favorable circumstances for that calculation the consequences of getting it wrong are so much worse than the consequences of like shutting down and you're having good policies in place to support people's incomes and make it through the economic aspects of the shutdown yes yeah and that's the that's the key point and uh this is the key the next key point which is it isn't the thing that allows you to not make that choice is our ability to use policy the government right to fix the problem so you you it's actually perfectly feasible to shut down the economy but it requires one hell of a fiscal support to make that to make that

feasible and and this so that that's the that's the lever that allows you to have both yeah right that that allows you to not crush people and also allows you to deal with the health health crisis right if everybody had to revert to sort of individualistic autarky as a consequence of this it would be disastrous and it would be you know people would be really really really suffering and then you could say, well, for these people, especially if they're young and healthy, otherwise, you might say, well, for those people, maybe they individually might want to take, if you let them, take the gamble. But, of course, you can't from a social point of view because those people who would be participating, they become risk factors for everybody else in terms of transmission. And so the whole thing unraveled. It's a clear case where there's like a huge macroscopic externality, right?

Yeah. That the government, that what you need, I mean, you know, standard tools of economics come into play here. That externality needs to be internalized and you kind of need the government to do that. And it's just an unusually large in a sense of like all pervasive externality. Because we can't sort of restrict it to individual sectors or individual market arrangements. It's just sort of society wide. We need to protect everybody else. You have to also limit your own activities.

And I think, Joe, you have to also limit your own activities. And I think, Joe, you mentioned this, it's not just old people, it's also people with health conditions. There's significant comorbidities. It's a no-brainer to me. And as you rightly said, Steve, mounting deaths are so politically unpalatable that governments will sooner or later implement some version of lockdowns. If that's the case, then why wait? The earlier, the better. Exactly. Exactly. And in a sense, I mean, you know, the Australian government has been doing this strange thing where they're

going step by step step by step step by step yeah and i i don't know i don't know what this is about i don't know whether it's because you don't want to i don't know whether it's they're updating their priors every day or whether they're worried about hitting people too hard too quickly but i i keep thinking like why didn't you just do this a week ago? Yeah, I want them to – my sense would be – so this kind of feeds into something else that we've been talking about, right, which is the government gave a speech the other day to the prime minister, and they talked about six months. This could go for six months, this shutdown. And I don't know. That seems like a long time to me. I think it depends what you mean by shutdown, right?

There are different ways to do this. So one is to have like a very, very intense shutdown for some months that hopefully brings new instances to near zero. And anyone who could imagine saying, look, we're going to slowly relax in a kind of careful control way, some of the most prohibitive parts of the restrictions. And if we see things flare up,

we may have to bring them back and we may have to kind of like, but we'll be coming from a situation we have very, very low incidents. It it's under in some sense under control and whenever we see kind of an outbreak we'll flood the outbreak with resources with like track and trace and everything we can and we may you know put back restrictions that we had temporarily taken away so there's you know this so-called hammer and dance uh type approach right so the idea that you're going to have six months and then it's going to be like six months of restriction

and then we're back to normality, that's craziness at the moment as far as I can tell in terms of like what the actual scenarios are going to look like. So when do you think the next time we'll be able to go to a restaurant is? Expectation. I think restaurants will be not in the first wave of things that that gets

but what do you reckon in terms of months months my point est like my point estimate would be something like sort of four four five months see it seems like a long time to me i don't know i reckon it's gonna be longer than people think. I reckon there's a lot of psychological denial out there. So, Steve, you were kind of talking about why they've been waiting. I think it's basically denial. It's just like, well, there's two things. One is disagreement, I mean, both within levels of government and between levels of government. And the other is denial.

And the part of decision-making is that they're going to really have to take these steps. I mean, we've seen it in every country right it's just a sort of a kind of a bias in the sense of like it's just not quite as bad as it really is yeah and it's just like the actual actions lag a couple of weeks a week two weeks three weeks behind where they should have been pretty much at the whole thing except maybe at the very very beginning when we had like the travel restrictions on china and things, you could kind of maybe argue that that was not lagging weeks behind. But more recently, it's felt quite – anyway. So, Chris, you think it could be five months before restaurants are reopened.

But I think both of you agree with me that it doesn't have to be that long. And I'm sure you both read the extraordinary Imperial College London paper by Neil Ferguson and others, which was kind of what nudged the UK government and also, I think, the United States government away from the mitigation slash herd immunity strategy that they were originally pursuing. The paper basically showed that the UK's hospital system would be overwhelmed if it pursued mitigation. But the paper also gave people the impression that suppression would need to take many, many months. And I'm not convinced that that's entirely true. So, for example, Hubei, the Chinese region of 60 million people, was able to get the virus under control in about five weeks, although that was obviously with very draconian shutdowns. Recently, Bill Gates has said that if a country does a good job with testing and shutdown, then within six to 10 weeks, they should see very few cases

and be able to open back up. On my podcast and very publicly, the MIT trained physicist and complexity researcher, Yenir Bayam, has advocated four to five weeks is all you need. And his logic is as follows. Whereas the mean incubation period for the virus is about five days, the range is one to 14 days. So, after the first two weeks, you've been able to identify and then isolate or treat everyone who caught the virus when the shutdown first began. The only other people they can infect are their cohabitants, spouses, other family members, housemates. What he says is you need another two weeks to identify the so-called second generation of infections. In that four weeks, you've put the virus into exponential decay, you've bought yourself time, but you need to reopen with mass asymptomatic testing,

contact tracing and quarantining as per South Korea and Singapore in order to keep a lid on the virus. Now, that's kind of like your nearby arm's view. Do you think that's naive, naive chris i think there's aspects there that are kind of true but there are aspects that i think um make that scenario look too rosy so right obviously yes it is true that once you get sort of cases under control and you can and so you have you know down to approximately zero new um new cases materializing then you kind of

do want to kind of switch to like massive testing of asymptomatic then you kind of do want to kind of switch to like massive testing of asymptomatic people and kind of be ready to throw it. So those aspects are kind of fine, but it's getting to that point. And the idea that you can get there in four to five weeks, maybe that would have been true several weeks ago if that's where we were starting.

But we've had you know right so much spread um that that seems highly unlikely so the thing i was going to say is that the mathematics here is very very sensitive to just how intense the lockdown is so you might think oh five weeks in china um okay why can't we have five weeks here we're doing something similar but we're not really doing anything that's that similar we're some sense, we're not nearly close enough to a full lockdown. And the hazard, if you like, the expected duration to get the virus

to come back down under control in these models is very, very sensitive to just how much distancing there is yeah it's very non-linear in that parameter if you like so that's why they're sort of the standard numbers come back at kind of four to six months because they're based on incomplete shutdown of the kind that we actually have as opposed to basically complete shutdown in which case you might get more optimistic scenarios but but that's just not the world we're currently in. Those aren't the shutdown, not all of these shutdown policies are created equal, right?

I completely agree, Chris. There was also a recent agent-based model of the pandemic in Australia put together by Mikhail Prokopenko, a University of Sydney complexity researcher, which showed just how sensitive variation in the social distancing could be to the duration of the shutdown and the spread of the disease. Can I also say something about that as well? Just like one other kind of nerdy point, which is that exactly for the same reason that those models, like the expected duration is very sensitive to those parameters. Also, our uncertainty about that average duration that we expect is very high, precisely because these things are very, very poorly measured. We have a lot of conflicting evidence about just how much transmission there is, just how long individual cases are um you know so all of that uncertainty in what you might call that the point of a better word the parameters of the virus

translates into uncertainty about the expected duration but it's all pushing in a direction of longer duration and very little of that is pushing in the direction of shorter duration. So I feel like if I'm thinking about the distribution of that statistic, it's kind of very skewed to the high end. It's not symmetric. It's skewed that way, which is why you do see, if you look in the epidemiological literature, people talking about as much as 18 months. So you don't see that as part of the public discussion so much because i think people just i don't know can really can really comprehend like what it would mean to be you know but you do see those as outcomes of these models like extremely lengthy periods

and i don't think anybody realistically has the idea that you would just be at a homogenous shutdown for 18 months. I think everybody understands that people would go crazy and that there are other ways to do it. They have episodic periods of intense shutdown and less intense shutdown as things seem to kind of mitigate so there's a lot of kind of unknown about how this might play out over the coming months right but yeah so we can think of it as like what we're currently experiencing in terms of shutdown

just injecting that forward in some constant way for some fixed interval of time and then life snaps back to normal that that's just not how it's going to be yeah there's various ways it might not be like that but it's certainly not going to be like that yeah so one of the key reasons for confusion in these conversations is everyone has a different idea of what a lockdown or a shutdown actually means um the harder we go the shorter it can be but steve do you think we've gone hard enough in australia so far well i think it would have just been i would have liked to have seen more more sooner and australians you know i love australians i and my american friends hear me constantly go on about how amazing australians are but uh our kind of she'll be right mate attitude is really

wonderful unless you're in a pandemic right where the she'll be right attitude is really bad right and and i think there has been a degree i've noticed a degree of you know very casual attitude towards uh the the virus that i think is it means that it the government has to go so much further than they might otherwise have to go because people just aren't listening right so there's a sort of you have to kind of overshoot in terms of the restrictions in order to get people to get to where you need them to go right so i mean i think what we're seeing now from the government seems right, but when I see them ban haircuts

and then take it back the next day, I just think, no. There's only a lot of confusion. Right. So more clarity is good. And, yeah, I mean, like I said, I'm not an epidemiologist. I'm not a public health expert.

It's hard for me to know what the right outcome is. And in fact, that makes this problem kind of diabolical because somehow we have to trade off these different things, right? Where there's people who know about some elements of these problems and not a lot of people who know about all of the elements of the problems. It's hard for government to make that trade off right in the right way. I think at the moment in Australia, the government has mostly been listening to the medical advice. The question about whether that medical advice is the right one, I'm not sure. But, but, but yeah, I,

so it's hard for me to say what's optimal, but for me, I would certainly be willing to go harder to make it in sooner. So let's agree that the Australian government could limit the duration of the lockdown to a matter of weeks if it went really, really hard, like China hard. But let's also agree that that is probably not likely. So, we can assume that this lockdown might carry on for many months instead. Yeah, I think that's right. Okay. In some form. In some form. In some form, yeah. And obviously, measures will be added or removed incrementally as we move through the pandemic. So, given that assumption, let's talk about what the fiscal response should be.

And Steve, you and Stan Vega have been speaking about this for a while. I want to quote you from a 25 March article in the Australian Financial Review titled How the Recession We Have to Have Can Be Sharp But Short. So, you and Stan write, quote, in a standard recession caused by a contraction in demand, the standard prescription known as the Keynesian approach is to flood the economy with cash in order to pump demand back up again. This was the approach the Rudd government took with its stimulus package in 2008. But this time is different. A substantial economic contraction is necessary to protect public So, what should a pandemic-appropriate fiscal response look like? Yeah, so a lot of the public discussion, in the US at least, was all about cash stimulus, right? And people evangelical about cash stimulus.

There's this hashtag, checks, checks, checks, on Twitter. So there was a sort of crazed evangelical obsession with broad-based cash stimulus to the point where people didn't want any targeting of this. They just wanted a blanket of cash across the economy. So Justin Wolf is an Australian economist who was one of my advisors at Michigan. He was in City Morning Herald a couple of weeks ago saying we need a bazooka of cash. He used the word bazooka.

And so I was kind of dismayed by a lot of this discussion, mainly for two reasons. One, I mean, it goes to what Chris and I were saying before. There is some contraction demand that's necessary and that quite simply cannot be pumped up. Either cannot be pumped up because it's legally restricted or should not be pumped up. Right. Exactly. So pumping money into those channels is obviously counterproductive,

right? And there are some situations where cash pumped into certain channels is only going to, when they're supply constrained, is only going to make things worse, right? So, Woolies being having bare shelves, us not being able to get Purell and toilet paper, like, more money in demand into those sectors is not going to be good. So thinking about this normal recession where we could just pump cash into the economy and where all of the plumbing of the economy is flowing correctly makes sense. But at the moment, a lot of that plumbing shut down. So if I give you money in a normal recession, you're going to go out to dinner. The probability that you go out to dinner goes up.

The probability that that restaurant worker is laid off goes down, right? But that's not going to happen this time. If I give everyone cash now, they can't go out to dinner. So what happens to the restaurant worker, right? So this is what I meant before about the tools that you use have to be different i was i would say the earliest person uh kind of in the public discussion to really hammer the importance of business support for small media businesses um now in an ordinary recession you might not do that you might just focus on cash stimulus but in this recession uh because

businesses are either being forcibly told to shut down or because you know people aren't going out to to to the shops and do all the normal things they would do because they're worried about the virus uh you're going to get you know know, without intervention, like untold business collapses. I mean, just unprecedented levels of collapses of businesses. I mean, even now, I mean, you can see every day in the newspaper another company shutting its doors, right? I mean, huge scale, we're talking of business closures. There was in the US a kind of rhetoric about, oh, don't help businesses, just help workers, right? That helping businesses is bad,

that any kind of support for businesses is sort of we should oppose. And to me, that was a very short-sighted, naive kind of approach to take, because what we have is a very unusual temporary pause to economic activity. The economy before this was quite healthy. What we call the matches between employers and employees, between customers and firms, between firms and their suppliers, were efficient, in a sense. They were the right matches.

We were in a pretty good equilibrium. We have this bolt from the blue that shuts everything down for several months. If we don't step in to help businesses, then all of these links break down. They're shattered. And if this goes on long enough they won't reform right you have businesses go out of business they don't exist anymore a lot of the the firm specific human capital you know the products you think a whole lot of things that are associated with businesses go away right and and then the virus is under control and we start opening up the economy again.

And it's not like everything's going to snap back to the way it was before. Because you've irreparably broken a lot of these links. So my concern was if you let these businesses fail, a lot of them are going to fail. The scale is going to be enormous. You turn what should be what we're trying to achieve, which this v-shaped recession like a quick bounce back on the other side into like a really deep really bad really long you know great depression level um recession so what was the what was our suggestion well our first suggestion in in in our first piece which was only uh not even three weeks ago was a cut to the employer-side payroll tax in america of about five

percent right so we said if you cut uh the employer-side payroll tax in america by five percent then american firms payroll gets cheaper by five percent uh they'll be more likely to hold on to staff because it's payroll tax. So it's a tax that you pay for having staff on, you're making workers cheaper. And it'll just be a cash injection for businesses. But like I said, it was almost three weeks ago, and it turns out 5% is like... In normal times, 5% reduction in payroll costs is great, but in the current environment, it's not going to cut it, right? We pretty rapidly moved on to more and more extreme models of business support that try and really keep these firms afloat, right,

and have them still attached to their workers. That's the two criteria in my mind. Keep the firms propped up through the crisis. Minimize the number of business failures. And do it in a way, don't just keep the businesses float like a zombie, you know, keep them afloat and keep them attached to their workers so that when the virus gets under control, the business can spin back up again quite quickly. And so we came up with a number of models, plans, that try and achieve that.

Chris? Let me kind of start at the kind of point of similarity. So the things that Steve talked about, like match specificity, like the specific human capital that might be lost because productive relationships are dissolved unnecessarily because of the shock, and then they don't reform.

So those are things that are about what you might call the underlying supply-side capacity of the economy being degraded, being run down, being lower than it needs to be as a kind of medium to longer- consequence of the shock right so you're kind of having this reduction in crudely speaking in sort of in productivity because of this shock this kind of and so that's one thing and then a second thing is this like because you have certain sectors of economy having to shut down you have this more keynesian style spiraling loss of income spending demand. And that is kind of, I'm harping back to things that I said earlier, that's kind of more normal, a more normal phenomenon of part of a shock in a recession. What's unusual here is you have both

the supply side elements and the demand side elements happening simultaneously. And then I think the attractive thing about some of the policies that Steve was advocating is they offer the chance of fixing both of these things at the same time. So that you have these two things happening and yet this one policy framework allows you to mitigate both simultaneously, which isn't to say that there aren't other things that we should be doing, because there are other aspects of this crisis beyond this employment-employee crisis, but I think that's the biggest one and the one that is most directly related to human welfare for the mass majority of people on the economic front.

At the end of the day, you have to, like in a normal recession, you have to keep people in jobs, and you have to keep people in jobs and you have to give people income support right i mean that that's the same in all recessions right you want to boost employment and you want to keep people being able to get food on the table right that didn't that doesn't change um but for me the business channel is the difference, right? So the thought experiment I had was, okay, let's just pretend we say to every business in the country who's experienced a reduction in, let's say, three-month period, we'll just plug the gap, right? Just plug it. Whatever it was, pick the number, we'll plug it. The government will give you a check that plugs the number.

But what you have to do is you have to keep every one of your staff on the payroll, and you've got to pay them what you used to pay them. Now, and we can add in little elements of like, okay, if they cut their variable costs, we take some of the money back or whatever. But basically, you keep the firm afloat. You keep them in the same financial position they were in before. So their decision to exit hasn't changed, right? They're actually quite, they're fine. And all of their employees have incomes. Nothing's changed for them.

Maybe they're at work. Maybe they're home from work. Maybe they're doing other things for the business, right? But no one would necessarily, you wouldn't get any firms failing and you wouldn't get any employees detaching from their businesses. Now, there's problems with that in the sense that some degree of reallocation of workers in this kind of environment is important, right? Woolies need some more people to stock shelves right so you

have to you have to work your way through this right like it's not it's not we don't necessarily want to go all the way but as a thought experiment anything is the right one which is you plug the gap of businesses in and then indirectly deal with the the demand side that way which we wouldn't normally do in an ordinary recession because the businesses would be handled through the Keynesian stimulus, right? So let me make sure I've got this correctly. This pandemic represents not just a supply shock. shock but steve's solution of keeping employees attached to their employers also manages the demand side problem of the you know the keynesian downward spiral that you spoke about chris yeah it does it doesn't manage all of the supply side problem because there's this underlying supply

side issue which is just purely the public health needs right yes nothing you can do but it but it but it does address the supply side issues in the sense of like the lost specific human capital and things that are more like long supply side issues that might scar the economy going forward got it yes and then i think we're genuinely would prevent a rebound i mean you really if you think about that it's like these relationships take a long time to reform like like coming up with the idea to start a new business, it's not like a… It depends a little bit on where you think the most marginal businesses are and where the… So that's true if you're shutting down…

There's a little bit of compositional kind of discussion there about exactly who is shutting down, whether they're the ones with the most long-term relationships being damaged. Yes. But yes, I think broadly… But given the scale of what we're talking about, I think it would cut a pretty wide sway through the... Yes, yes, that's why I agree. We're in furious agreement, can you tell?

I have two economists, so I was expecting three opinions. Well, not everyone. There's only half. You happen to pick two people who agree. Let me be clear. I've spent plenty of my time on Twitter arguing. I won't get you to talk about those people. So, Steve, Chris, we agree on the wisdom of the response that you've outlined but the australian

government did drag its heels and chris in a march 30 op-ed with bruce preston for the australian you implored the australian government to introduce very strong fiscal measures and you wrote that australia has been very prudent with its fiscal policy. We have low levels of gross public debt relative to national income, and we have even lower levels of net debt. And you wrote that, quote, it's important to remember that economists don't generally advocate prudent fiscal policy for its own sake, but because it provides us with a powerful tool that we can use in a crisis. Now is the time to use that tool. What else could we be holding back for? End quote. Why do you think the Australian government

dragged its feet for so long? And do you think that's surplus fetishism is finally dead let me take the first part so for the so long is tricky right so in ordinary circumstances if you just think about like time from beginning to to yesterday and the size of the announcement it's very short especially relative to the size of the so you might say they move very fast i mean i think it would be fair to say if i was josh friedenberg i would say we move damn fast and and so so drag your feet is in some sense i understand what people mean and i have criticized them for moving too slowly but let's understand what that means that means relative to the shock that was about to be reverberating and was already reverberating to the economy right yeah a week a week is a long

time in pandemics yes a week is a long time in this country no one's ever spent 130 billion so quickly no exactly so no no literally it's true. But last weekend, they were out. I was flying back. I was in the plane, and on Wi-Fi, they're like, we spent $66 billion, and it was like, wow. Yeah. A week later, it's double.

In addition, so the whole thing is like, yeah, three, four, four. No, no, so just on the dragging your feet front, you just have to kind of think about, like, what is the yardstick here? On the one hand, slow relative to perhaps ideal. On the other hand, super fast compared to historical precedent. So that's a little bit like in the eye of the beholder. Okay. Is this going to kill surplus fetishism? I mean, I'm already seeing, like, people come out saying, like, how are we going to pay for it?

Like, the debts that we're, like, going to be leaving to our grandchildren. And, I mean, most of those complaints are kind of borderline innumerate if you actually run the numbers. Yes. I mean, this is a significant amount of debt, but it's not a crushingly large amount of debt compared to the capacity of the Australian economy. So just to kind of ballpark it, and I was doing these numbers this afternoon, it's just trivial, like just to kind of do it in round numbers terms, the total amount of the stimulus that's been announced is roughly speaking equivalent to $15,000 worth of debt for every Australian worker, everybody in the labor force, let's say.

So $15,000 of debt that you suddenly were like tapped on the shoulder and said, you now owe $15,000. Like obviously this, you know, that's a non-trivial amount of debt, but I don't think you would characterize it as like crushing you forever in a kind of like, you know, this is something forever in a kind of like,

this is something that you're going to, your grandchildren are going to still be paying this off. All that kind of rhetoric is completely disproportionate to the amount of extra borrowing we've taken on. Chris, how much do you spend every year for car insurance? Car insurance is like $1,000 or something. Every year? Just the premiums, yeah. Yeah, so you spend $1,000 every year. So over a 15-year period, you spend $15,000 on car insurance. Exactly.

Does anyone ever say that crushes you? No, exactly. Do you feel crushed by that? It's innumerable. You buy it because you have a bigger thing that will happen if you don't have car insurance and you crash your car, right? Like, it's crazy. And we could have, if you were just to think about this a little bit rationally for a second, we could have done this. Like, if we knew that this was coming down the pipe,

we could do it. We could design it in a better way that was less fiscally expensive. But even in this sort of after-the-fact kind of way where it hasn't been done ideally, and even if it ratchets up a bit further, which it might, especially if the thing goes on for longer,

the big thing that might blow out the cost here is if it drags on like nine months it starts to blow up if you're going to have to keep doing this forever but if you're doing it for even a year even a year we're talking about not even World War II levels of indebtedness. No. Right? So well within the capacity of the economy. And that's like for very generous schemes. And so like right now, like there's all sorts of margins where we could be tweaking this thing.

Right? That's still basically pointing in the same direction of the right response, but that would not necessarily be making it quite as expensive. For example, we don't need to support all large employers to the same extent. There's all kinds of margins here we could be playing with if we wanted to dial it back. And if it goes on and on and on, you might want to start playing with those margins to dock back the expense. But at the moment, given what's currently announced, as Steve's saying, this is a very modest kind of expense over any kind of

reasonable timeframe. It would be a little bit expensive if I asked you to pay it back like over the next year for most households, but we're not going to be doing that. That's a kind of crazy counterfactual. The whole point of the government in this situation is to use its long horizon to amortize these kinds of costs and to kind of just to smooth that thing out all this debt is going to be issued at very low interest rates yes that and that is crucial right i mean i mean that's a it's a key part right we happen to be a basically zero real interest and you know it's hard to think of something that the government could be buying right now that could have a higher like present value like i have a higher rate of return and the interest rate doesn't float it's fixed yeah yeah well so we can lock in we can lock in

today's yeah yeah yeah yeah steve do you want to give us a brief outline of the JobKeeper package? Yeah, yeah. And then after that, we can talk about whether it went far enough. Yeah, yeah. So I'll tell you one thing. I never thought, I mean, I never in a million years thought I would be the, you know, a fierce advocate for a 130 billion dollar wage subsidy the notion seems absurd right if i think about it like one month ago no way i would have bet a lot of money this wouldn't happen uh but i i was pretty aggressively in favor of it so as as i said before

i wanted a replacement i like the revenue replacement for two reasons. One, it targets the firms with the revenue losses, and that's the source of the crisis, right? And two, it doesn't subsidize people who didn't have a reduction in revenue, right? You don't want to give them money, but you also want to give the people with the full reduction enough money to cover not just their labor costs but other costs, right? Certain fixed and variable costs that they have to incur.

So I kind of wanted that scheme, but that was pretty unlikely. In the US, what they're doing, by the way, is they're covering – so basically this is like covering firms' payrolls. So you have a payroll, like how much you pay your staff. In America, they're giving you two and a half months, but two and a half months of your prior payroll, if you keep your payroll. But if the crisis for you goes on less than two and a half months, any extra you can use for other expenses. So it's kind of getting closer to the revenue replacement model, right? So the one that Australia went with was a payroll subsidy or a wage subsidy. It's fixed per worker. So every single worker for any firm who's had a revenue reduction of at least 30% and very, very large firms, 50%. The government is going to give that firm $1,500 a fortnight

for every single worker at that firm. It covers full-time, part-time, casuals who've been there longer than a year. It also covers self-employed people. And it's a fixed amount of subsidy, $1,500 a fortnight, for every single employee, regardless of how many hours they do, regardless of what income they earn. It's just they take the number of employees, multiply by 1,500. And that's what they give them every fortnight.

So the calculation I did, I just had a look. So Qantas has 30,000 employees, right? 30 000 employees right so uh if quantus has a reduction in their revenue of 50 compared to last year then this subsidy is about 600 million dollars it's 100 million dollars a month that the government's going to hand to quantus right so we're talking really large numbers right and there's many many firms and i think they said today that there's been 250,000 businesses that have signed up already in 24 hours. So, you know, it's $130 billion over six months, which is roughly one third of our current net debt. So it's a large package, you know. But to be honest, in the Finn article that you mentioned before, I made the point that Australia was crowing about having an $88 billion package, and America just passed a package that would be equivalent to about $300 billion in Australia.

So, $250 to $300 billion. So, you know, we were at $80 billion. We've added $130 billion to it. It's not out of the league of normal sizes of stimulus that we would expect in this situation right so it's a big package but it's it's about par um now in terms of the design of the package you know it's it's it's a fixed a fixed for every employee it only goes to firms with large reductions in revenue uh you're it's for all your employees who are on the books as at March 1, right? So it's like a backdating in terms of the eligibility requirement.

And they say if you've let workers go, you can bring them back and they can get the subsidy. The other thing that I thought was interesting is it's combined with a wage floor. So it's $1,500 for every worker worker but you have to pay all of your workers at least 1500 if you want to be eligible for this game so that means that for anyone who would be a raise for a bunch of people and it will be because it's like it's like the 40th percentile of the wage distribution or something right so it's like all these so casuals it's going to be a lot of money x a huge raise right so 40 percent of 40 percent of the workforce their wage is going to go up and so but for those workers the businesses don't get any extra relief right they just have no it all flows to the workers yes so they have no surplus the

business in that situation have no surplus it's only those who are kind of like who are paying more than 1500 per fortnight per worker yeah so the only way the firm can like profit from this is you know workers that are earning more than 1500 a fortnight you know paying them less basically so the interesting question is to like ask like statistically like which firms are the ones that have relatively expensive workers, but also, like, so this is, like, where the quantices of the world are going to be the really big beneficiaries relative to, like, your corner cafe is not really going to see much benefit from this in terms of the owners, right?

The workers will see the benefit because that'll get a raise but from the from the cafe's point of view it's just like subsidy comes in subsidy goes out but the firms that have lots of expensive workers who are paying already more than you know 1500 a fortnight for their workers they're going to reap that if you excuse the technicality that that inframarginal gain over and above that wage floor. And to me, you know, I mean, it's not clear, but it's not obvious. It seems to me it would have been better to target workers more precisely, right? So not have this wage floor. Like the more UK system where it's just like proportional,

something like replacement rate yeah the existing i mean i don't understand i've been arguing about this on twitter but like there's nothing it's no harder to do it that way like it's not like i mean no it's easier in some sense yeah you just literally take like instead of taking so what they're already looking at prior information right because they have to look at revenue drops compared to previous periods they're already looking at prior employment because that's how you're eligible right so it's just a matter of uh taking prior payroll just in total for the whole business and giving a check equal to that amount and you could you could do things like um like the uk and the us they cap the salaries so we don't give you the high earners, we cap it at 100K or something. So you can do it on Excel, right? So there's this other little glitch in the Australian system, which I think plays into this, which is this, okay, you can only claim it once, right?

Because, of course, if you work for multiple firms and you have this wage floor, then you're claiming it multiple times. But then you have to declare who is your principal employer. And so some firms are going to get it, but not others. Whereas the true underlying situation might be I work 20 hours with two different firms and one of them is going to get the subsidy and not the other. I'm going to arbitrarily declare one firm my principal employer. They get the subsidy. Other firm doesn't.

Whereas if it was in the uk system and kind of more proportional they each get a chunk of it implicitly exactly right because you would pay out in sort of in some sense in proportion to the hours that you contributed to each of those firms exactly and it's totally doable i mean you just cover payroll and the condition that they impose and it's easy to design it this way is that any reduction in your um you can come up with a formula but the u.s scheme works like this any reduction in your full-time equivalent hours like the number of hours worked by your employees if it goes down by half then you only get half the subsidy yeah right so we we tax any reduction in your actual payroll so we give you a big chunk of money

up front to cover your payroll and then any reduction your actual payroll we just tax it at 100 right and that means firms will keep payroll up right because there's no benefit to reducing hours um you could do that it's not rocket science like there's no reason why you couldn't have designed it that way um yeah no and it means absolutely so and to my mind it means you know the better targeting means it has to be cheaper essentially right there's like a there's some kind of um and i mean there was a study out today that showed this but the idea would be you know you're you're better targeting firms you're paying you're not forcing firms to pay these low workers more and your subsidising higher workers more and it ends up working out that it's cheaper overall.

And the only reason they put forward in public was it's Australian way or something. I don't know what that means. I think it means everybody gets the same. But it's actually not true, right? So it depends on how you think of it. Because if you think of it from the worker's point of view... Some people are working half and getting paid the same amount. Yes. That's not fair.

Yeah, it depends. And also, there are going to be some businesses that don't get it because, you know, the part-time worker has declared that somebody else is their principal employer, as opposed to being able to share the subsidy. So, I mean, it's a kind of glib line. I'm not quite sure. How pissed off would you be if the part-timer is getting the same amount as the full-timer if you're the part-timer? You're like, I'm getting two days of a week and I get the same.

This is fantastic. There's going to have to be a lot of like sort of internal negotiation so i would say just just looping looping back in terms of you know like because we got into the weeds there a little bit uh my view is if it's this or nothing, it's not even close. Do it. And I was really worried, really worried on the weekend that they were going to kind of go soft, you know, cheap, not that, you know, like only certain firms. And I was like, oh, I was very worried that it wasn't going to be substantial. And when I sat and watched the announcement, I was like, wow, okay,

this is at least of the scale that we need, I think. And that's really great. And then there are just some bizarre design choices that are difficult to understand that I think would be very easy to change, but they haven't. And so, yeah, so I support it for sure, but I wouldn't have done it like that. So what about the stipulation that you need a year of employment history to be eligible? Do you think that's wise? This is one of the crazy things. It makes no sense, right? Like, I mean, it's penny-pinching here.

And it's one of the things where you could have easily, to the extent that you're saving pennies by excluding casuals who don't have 12 months of employment, you could have easily found those pennies by not paying people who are only working a small amount and giving them a pay raise. It's not so much money. You're basically taking money out of the hands of your high-rotation casuals and taking effectively support you could have given them and giving it to people. It's tenure. You're getting, yeah. No, it's not tenure.

No good. But it's, so that's bizarre, right? I mean, why do that? Yeah, it's crazy. It makes no sense. And I mean, it makes no sense from an economic design, like, efficiency point of view, and it makes no sense from a kind of egalitarian Australian way point of view. It's just…

And especially because it's backdated. Yes. It's backdated. So it's not like you'd be worried about all these people jumping in to get the subsidy. It's immovable. It happened in the past. Yeah. So you don't need to worry about that. I don't know what proportion of... Moral hazard point of view, it's not an issue. So all these things you might classically worry about in a weight subsidy kind of setting

are also turned off. Now, Steve, are you expecting further rounds of stimulus? I don't know. I mean, I think they're probably – as much as I'm the anti-checks, checks, checks guy, I think probably more cash stimulus at some point is going to be necessary. I don't know what that will involve. But one of the concerns I have is what this ramp up of the economy is going to be like.

And so you worry a little bit. So now I refer back to being a Keynesian, like the animal spirits guy, where I worry about people being cautious, overly cautious, people being worried, people's confidence being impacted by this to the extent that it might affect the recovery right so there might be a need i think i think we have enough income to

get us through the next period with the beefing up of new start and then this this uh job keeper package um but there might be something necessary in the next, let's say, three, like as we start to lift the restrictions, like three to six month window, something in the order of like those, you know, the run government kind of stimulus checks. I would probably expect to support that kind of thing. I don't know what Chris thinks, but. Well, so we've already seen like these uh these two one-off uh stimulus checks for kind of pension claimants and of various kinds yes so you could imagine like a broader round of such

things those are very small 750 one-off payments twice so 1500 total so you could imagine to to a to a narrow relatively narrow slice of population. You could imagine like broadening that out. So anyway, to come back to your question, Joe, I think the answer is yes, you probably will see some more fiscal stimulus. I doubt you'll see like anything more that is particularly aggressive until we have a better sense of what's going on, right? And frankly, from a kind of more classical demand management point of view, you might think that's also where the Reserve Bank has a greater role to play. Like if we're coming out of the more exotic features of the crisis and into more normal territory, you might think. I like that. It's good.

I don't really think, yeah. So there's an exotic phase and a kind of like more sort of normal phase. As we come out of the more exotic phase, I think it would be easy to make the case that the Reserve Bank should be playing a greater role in picking up some of the demand management aspects that they really can't do. It's just not the right set of tools for the current situation. I mean, they can do certain things to maintain the integrity of the financial system and prevent... That's the whole job at the moment, right? It's just like keeping the payment system functional, keeping working capital rotating and so forth. But beyond that, they

don't really have a role at the moment, but they may in nine months time. Yeah. Well, let me ask about that. We've spoken about the real economy, but I am wondering about the financial economy. And if you looked at Google search trends today, thousands of people were Googling, are my savings safe in Aussie banks? Chris, do they have cause for concern? I don't think so. I mean, I'm not saying that you should never worry about your savings in a bank,

but that is not what I would be, that's not the crux of meaningful concern right now. Yeah. I just, that's not the kind of crisis that we've been experiencing. Although it is interesting, by the way, we didn't mention in the technicalities of the JobKeeper allowance, we didn't discuss the fact

that banks are explicitly excluded. Ah, yes, that was great. That was a really nice... So the only... If you were subject to the banking... explicitly excluded. Ah, yes, that was great. That was a really nice question. I actually never thought you said it. If you were subject to the banking... It's like if you're subject to the major bank's levy or something. Yes, exactly. Like you could have listed them, right?

But for all intents and purposes, if you're a major bank, if you're a major deposit-taking institution, you're excluded from this form of assistance. There's two ways to read that. One is the politics of it, which, of course, it doesn't look great. The other is, of course, presumably that maybe they think that they're not worried about banks going under. Because if you really were concerned about banks going under, this would be a way to have a bailout without having a bailout, right? Yeah. Because those banks would be like the Qantas situation. If they're really worth suffering big losses, then you'd be effectively handing over hundreds of millions of dollars.

And it wouldn't look like a kind of bank-specific bailout. Yes, yes. I suspect that tells you something about where the concern is. So there are some weird things happening. There are definitely some weird – I don't know about the Australian financial system, So I suspect that tells you something about where the concern is. So there are some weird things happening. There are definitely some weird – I don't know about the Australian financial system, but there's definitely some weird things happening in the U.S. financial system. And I don't know that world that well, but a lot of people are talking about some pretty strange things. So I think the Fed is doing a lot to try and shore up the financial system.

Oh, I mean, we've had similar conversations here, right? I mean, a lot of it comes down to people having to liquidate positions when they weren't really expecting to, which puts a lot of, like, strange pricing behavior that was not really anticipated. So you see a lot of, like, various kinds of credit spreads spiking as people move out. This is one of the reasons why the australian dollar has like been falling right so like people moving out of dollar denominated assets because they've been you know been liquidating what from their point of view from like a u.s investor's point of view is a risky thing like investing in this australian dollar asset so you've seen a lot of that and that's pricing behavior but but i'd be more worried about what was underlying joe's original

question which is more like solvency concerns of actual financial institutions. So we might see prices spike and cause a little bit of distress here and there. And that can be sort of mopped up with various kinds of banking tools. But the kinds of things that you're alluding to, which is more like solvency concerns in the financial system, that would be a potential source of concern, but I just don't really see it at the moment. I see a lot of like basically relative prices moving and some people being made better off by that and some people being made worse off by that without it being like a particularly big deal in the aggregate economy right now. In that sense, a lot of the kind of things that we were alluding to earlier to do with

like people viewing it sort of like fighting the last war, the financial crisis. Yes. Those things were all absolutely central and just cannot this time. It doesn't mean they can't be ever again, but right now that's not where the action is. Yeah. Yes. It's a different beast. So, Chris, Steve, we have spoken for about an hour and 25 minutes

i've got a final question for both of you you're in a room with scott morrison the prime minister and josh friedenberg the treasurer and you have no more than two minutes of their time you can tell them anything it can be advice can be encouragement. But you have only two minutes. What do you say to them? Chris, we'll start with you. I would say the one place where the stimulus so far has been stingy, like given recent development, is in terms of direct resources for public health. If you look at the amounts that have been devoted to actually increasing support, both at the federal and the state level for the public health response, that I feel like is underdone. And we could do a lot more in that front to kind of make sure that as we kind of

move into the next phase, like so that we're kind of talking about like mass testing of asymptomatic cases and things like this, and a lot more effort in kind of like tracking and tracing. There's a lot more that we could be doing on that front that I feel like has in some sense, it was present earlier in this discussion, I feel has been lost in the last couple of weeks. You know, and just like longer term, I think we're kind of all seeing like the potential cost of running really, really, really tight ships in kind of like the hospital system, right? We can, you know, pride ourselves in having not a lot of slack in that system. And now we're seeing what it means when there's not a lot of slack there. So more stimulus for public health measures?

So think of this as like the wartime aspect. So a lot of people make analogies to the wartime aspect. But part of what you do in wartime is you buy tanks, planes, ships. That's what a lot of the stimulus in a wartime is, is actual purchases of goods and services. Here, the actual purchase of goods and services is purchases of health services and health capacity. And we could do more on that front. And I feel like that's, in some sense, been slipped below the radar a little bit in the last couple of weeks.

Steve, you have two minutes with the Prime Minister and the Treasurer, what do you tell them? Well, bouncing, I was actually going to say the same. We are at a unity ticket here. But my point was, the value of a test, a single test, is vastly greater than its cost. Even in a supply-constrained environment, you just pay whatever the hell you can to get as many tests as you can. Whatever the price is, you just pay it.

So I would like to see Australia pay exorbitant amounts for these tests and for lab capacity to process these tests. Just throw insane amounts of money at this problem. Because for every test you do, the economic cost is radically, and the economy is radically reduced, right? So the cost-benefit ratio to a test is just enormous, right? So I would say put more money into that than you could ever imagine because no matter what number you're looking at,

it's going to be way less than the cost of not doing that test. And then the other thing, I would just loop back to the JobKeeper package and say, get rid of the top 500 firms in the country. Just chuck them out. I don't care. And make it a payroll subsidy. So get rid of the wage floor, cover the firm's payroll, up to $100,000 a year, be done with it. You'd save a bunch of money if you did those two things.

It would probably save $30 billion of the $130. And put that $30 billion into testing. Well, I would put some of that $30 into like like like high rotation casuals which would not be cost a lot right sure sure yeah well guys thank you so much we we went bang on an hour and a half yeah so chris edmund thank you for joining me thank you and steve hamilton thank you thanks mate good chat cheers guys thank you thank you so much for listening i hope you enjoyed that Good chat. Cheers, guys. Thank you. Thank you so much for listening. I hope you enjoyed that as much as I did.

For links and notes to everything we discussed, you can find those on my website, www.josephnoelwalker.com. That's my full name, J-O-S-E-P-H-N-O-E-L-W-A-L-K-E-R.com. I'm also on Twitter. My handle is at josephn walker until next time thank you for listening and be well ciao