Memories of the COVID lockdown

What happened March 13 to 27th 2020?

I realise everyone is busy with the Budget this week. But we are also five years out from COVID kicking off. As I have limited value add for Budget proceedings beyond the pre-podcast, I might as well share some memories of the start of lockdown.

A couple of weeks ago we reminisced about the lead up to COVID and the declaration of the global pandemic. Within a week of this announcement both Australia and New Zealand were in lockdown - something that was mentally inconceivable merely a month earlier.

Blog recollections can only take us so far. There were four posts between the 13th and 27th of March on TVHE - which I will discuss below - but there was a lot that Andrew, Gulnara, and I could not write about given the live policy issues.

During this I’ll highlight different directions Australia and New Zealand took over the first couple of weeks of lockdown. Given this who knows, we might have a post about JobKeeper to celebrate the five year anniversary of the scheme ;)

Blog and OECD policy documents - the real memory lane

March 16th - three days after the global pandemic was declared, but a week prior to lockdowns. This was when the crisis really started to show up in public.

This was the day that the Canberra National Folk Festival was cancelled.

[Looks like the cancellation was a bit too late for the group on the far left whose arms have merged together!]

Well, that and a State of Emergency in Victoria.

In this environment, two important economic institutions stood up to share thoughts on policy responses - the OECD and Gulnara.

Starting with Gulnara’s post, things were moving so quickly that four separate blog posts needed to be written at once in one blog (TVHE version with the Tweets showing)!

At the time economists were doing their usual thing - trying to test out different frameworks and ideas to say contrarian things. Is this actually a positive demand shock and hence is monetary easing wrong? So we wanted to note why this doesn’t appear to be the case.

The rest of the post was focused on concepts that are very familar now - “insurance”, “protecting productive capacity”, and “this is a health shock not an economic shock”. The first has aged much better than the rest - and unsurprisingly it was Greg Mankiw making the most sense.

The insurance shock is fairly straightforward - this was a tail risk event occuring to a specific group of people at a specific time. Governments can shift this onto their balance sheet and redistribute the burden of COVID across people through time to make it fairer. Little did we know a key mechanism for this future payment - large scale inflation - would completely break large parts of society even more than being locked down (something the comments to a 2022 article of mine make quite clear).

Protecting productive capacity was where the rationale for job retention and business loan schemes that appeared - I think the logic is best described by the Australian economists that pushed for it.

These businesses would be viable if it weren’t for the necessary public health measures currently being taken. Allowing them to fail would mean the pointless destruction of valuable resources.

In the absence of JobKeeper - or the wage subsidy in New Zealand - there was a concern that solvent but illiquid firms would fail, and/or that productive matches would be severed. So these policies were needed to allow the economy to “unfreeze” with more capacity than they would otherwise.

Maybe not perfect - but a huge amount better than nothing. So this framework was - in the early months of COVID - a good one.

The health shock point was a line to promote the discussion of public health above a blind obsession with preventing a recession. There is now a health externality, we need to have individuals internalise it, and that will generate an optimal recession.

This framing was true - but this is still economics. The willingness to abdicate at this point made it harder for economists to push for cost-benefit analysis later - and I’d argue is part of the reason why economists are so quiet post-COVID about everything … at least relative to pre-2020.

What about the OECD?

I was in a tax department during COVID, and so the most active international agency I saw was the OECD. They were reaching out to tax authorities to communicate about policy and economic frameworks, and to ask jurisdictions to list the different policies they were introducing and why.

The meetings were hardly at pleasant times for New Zealand - but the documents that came out were useful.

You can see the list of documents - and their regularity - here. The first full advice documents were the two one-pagers released on the 16th - one on cash flow support for households and businesses, and one on business continuity for tax authorities.

Business continuity was a significant concern - with a pandemic underway how can the tax agency interact with taxpayers, not just to raise revenue but also to provide support.

A key lesson during this early stage was that most governments were better at raising revenue than at handing it out. For this reason, tax agencies were better at continuing to interact with customers than other agencies - and so an increasing amount of government support would end up being delivered by tax agents.

But before that the purpose of tax changes were to keep households and firms liquid when they are solvent - so managing cash flow. Allowing deferrals on GST and payroll tax been done in Europe already, and were being recommended in other countries now. This included removing fines for late payments, and being more generous with regards to tax withholding based on prior revenue (given the economy was on ice).

It wasn’t until the 20th that the OECD started suggesting increased generosity in terms of social support in order to “protect productive capacity”, alongside more detailed discussion of the role of expanding benefit eligibility and lessons across countries.

By the 24th the OECD was back to normal - switching from single page flyers back to full papers. The focus this time was a justification for lockdowns and “flattening the curve”.

Although these documents largely did confirm what was already being done in places like Australia and New Zealand, they did help clarify trade-offs, empower the global public service to move forward with these policies, and helps states with more limited state capacity deal with COVID. It is crazy to see how much ground the OECD covered in just one week.

Path to lockdowns

On the 17th of March New Zealand was inspired by the arguments above and internal knowledge about disaster management - and introduced a Wage Subsidy. This was introduced well prior to lockdowns, a fairly important distinction. However, New Zealand also did not lift core unemployment benefits (although work hour requirements were removed from the in work tax credit, and at a much later date a form of income insurance “CIRP” was introduced).

Australia did do earlier lump sum payments to benefit recipients, but the big COVID supplement was not announced until the 22nd of March (with payments only starting from the 27th of April). This was an increase in unemployment benefits. However, at this stage there was no wage subsidy.

There was a series of business supports coming online - alongside tax deferrals - during this period. OECD guidance was influential at share ideas across jurisdictions.

However, while tax deferrals (and immediate expensing) were well regarded - the loan structure of a lot of business support was driving low take-up in both countries. As a result, there was a lot of focus on the ability for the central bank to provide sufficient liquidity and a shared view that part of the purpose of “wage subsides” was to provide cash flow support to businesses that are otherwise solvent.

This explains Gulnara’s relatively niche sounding piece on money financing and unconventional monetary policy on March 19th.

New Zealand’s lockdown started as partial on March 21st, full on March 23rd, and by March 25th became one of the most restrictive lockdowns in the world. Australia entered lockdown on the 23rd. When the proper lockdown started in New Zealand Andrew Coleman also shared his experience of lockdown in Morocco with us.

By the 26th Gulnara and I found ourselves busily trying to do our jobs but unable to shop - so we decided it was time for more talking about Twitter alongside demand and supply shock (TVHE post with embedded tweets).

At this stage Australia still doesn’t have a wage subsidy. In New Zealand we don’t realise just how much this policy has prevented surging uncertainty and job loss - we’re instead focused on the frustration of not being able to order take-out during a lockdown.

But as the tweets show, there are incredible economists arguing about how we should be focused on the policy response for this - whether it is about fiscal responses or funding cures.

Where are we by the 27th?

In Australia the country is in lockdown, but JobKeeper is not in place. Unemployment is surging as will be confirmed in the coming month.

In New Zealand the country is in lockdown. There are wage subsides and we’re all being informed to be kind. My two jobs appear to be writing short policy briefs on a million different possible tax adjustments, and teaching intro economics from the dinning table to 1,000 students - both things keeping me busy and sane thankfully.

And I didn’t even mention that a week earlier both countries had shut their borders!

A month before this happened, the very idea we would lock down like this appeared impossible. A month in the future it, and the concept of working from home, would be almost natural. Crazy times.