Covid policies: what went right and what did not

The COVID-19 pandemic that began in early 2020 has thrown up the most profound challenges Australia has faced since the second world war. Nearly 15% of the population has been infected with the virus so far and about 5000 people have died to date. Worldwide, there have been over 400 million cases and nearly six million deaths.

The pandemic is ongoing, and no one knows when it will end. Nonetheless, now is a good time to review some of the policies governments in Australia have put in place over the past two years to combat the impacts of the pandemic. This is a huge subject, and this article can only cover a few of those policies: namely, the fiscal and monetary policies to assist individuals and businesses; and the purchase by government of the vaccines and Rapid Antigen Tests. The focus in this article is one of economic analysis - the impact on the economy as a whole and resource allocation and individual behaviour. The article steers clear of medical questions and space doesn’t permit discussion of policies on border closures, lockdowns, mask mandates and vaccine mandates, among others.

Economic Policies

From the outset (March 2020) there was a recognition by Commonwealth and state governments that the pandemic because it would lead to forced closures of businesses for an indefinite period, would have large economic costs unless offset by macroeconomic policies. In the event, both arms of macroeconomic policy, fiscal and monetary, were used to very good effect in combating the economic impacts of the pandemic.

The Reserve Bank, through its monetary policies, kept interest rates at minimally low levels so reducing the cost of borrowing by businesses and households. A number of fiscal policies were implemented by the Commonwealth and the States, including rent relief, payroll tax deferral, and doubling of JobSeeker payments for unemployed people. The largest program was JobKeeper.

JobKeeper was a payment to businesses of $1500 per fortnight per eligible employee. Most organisations that in April 2020 forecast a 30% reduction in turnover, received JobKeeper payments for the June and September quarters. For the next two quarters payments were made if organisations had experienced actual reductions in turnover.

JobKeeper ultimately cost $89 billion, about $40 billion less than was originally projected. It had several benefits. It kept up cash flow to businesses, especially small businesses and it kept people employed (even if they weren't doing any work) and kept their attachment to their employer. Most importantly, JobKeeper kept incomes and spending up and so the economy avoided a prolonged downturn. While the economy contracted sharply in the June quarter of 2020 (GDP fell by 6.8%) it rebounded strongly and by the end of 2020 was almost back to pre-pandemic levels.

JobKeeper and associated policies worked better than anyone could have anticipated, evidenced by the fact that it was underspent by $40 billion – when it was designed the Commonwealth Treasury thought that the downturn in business activity would be deeper and longer than turned out. In reviewing JobKeeper, Treasury concluded:

“JobKeeper contributed to stronger economic outcomes, and better business performance, than anticipated. The fall in employment following the outbreak of COVID-19 was rapid and much sharper than in previous downturns, but as a result of the policy support and better-than-expected health outcomes the recovery in employment was also faster than in previous episodes.”

JobKeeper worked well because a pandemic recession is different from a standard recession. Channels of economic activity are shut down, and this makes direct payments like JobKeeper a more effective policy than general stimulus. There's been some recent academic work¹ that sets out a simple conceptual framework.

Criticisms

For all its success, JobKeeper has been heavily criticised, on the grounds that many businesses received JobKeeper who ‘didn’t need it.’ That is, they didn’t experience any fall in turnover; in some cases, turnover and profits increased. This criticism is understandable but not really warranted.

In March and April 2020 when JobKeeper was devised, there was a genuine and not unreasonable fear that the economy was going to be devastated, so something had to be done and it had to be done quickly. JobKeeper was designed and implemented in a matter of weeks as it had to be. Normally, a program of that size would take years to design and implement (for example, the NDIS).

More to the point, the reason that businesses who did well through 2020 did do well was largely because of the support measures, including and especially JobKeeper, that governments put in place. This was because these measures kept incomes up to people who would have otherwise been unemployed, and they spent those incomes in places like Harvey Norman (which has been seen as the exemplar of a business that received Job Keeper unnecessarily).

In the absence of JobKeeper, the economy would have been in very big trouble and most businesses in Australia would have done very badly. So, ironically, because JobKeeper was a success, the critics say it wasn’t needed. But if it hadn’t been there, the economy would have been in a deep and long recession, and critics would say a program like JobKeeper should have been put in place.

It is possible to think of better designs for JobKeeper, for example, payments in the September quarter of 2020 could have been made conditional on actual revenues in the previous quarter. This was in fact the policy for the next two quarters. Against that, if in April 2020 the Government had said that JobKeeper was only guaranteed for the June quarter, this might have been insufficient to maintain business and consumer confidence. Some have argued that businesses should have been prevented from paying dividends to shareholders and bonuses to executives while they received JobKeeper, but businesses can pay dividends and bonuses at any time. If such a rule had been in place, it would only have delayed the payment of dividends and bonuses. Finally, it should be remembered that JobKeeper payments were taxable income, so 30% of JobKeeper payments for large companies (a different proportion for other businesses) would have been returned to the Commonwealth Government as taxes.

It’s also true that both as a result of aggressive fiscal policies, and the downturn caused by the pandemic, government debt (Commonwealth and state) is much higher than it was two years ago (about $1 trillion for the Commonwealth Government). Fortunately, the interest rates on that debt are very low, and likely to remain low for a long time. There is very little prospect of any government in the future actually paying back that debt. But if the economy grows strongly in the coming years and decades, the debt will become smaller as a proportion of our national income.

Vaccine procurement

This was not done very well. The Commonwealth Government’s strategy on vaccine procurement in 2020 was to choose one from each technology – Pfizer over Moderna (mRNA vaccines); AstraZeneca over Johnson & Johnson (viral vector vaccines); and Novavax over Sanofi (protein vaccines). Moderna became available later and Novavax has just been approved. The Government also favoured vaccines that could be produced locally, AstraZeneca (made by CSL) and a vaccine developed by the University of Queensland (which failed in the development phase).

Inevitably, because the whole world wanted vaccines, there were holdups in supply with the result that 90% or so of the Australian adult population was not double vaccinated until late in 2021, an unnecessary delay of months. What the Government should have done is buy all of them, or at least purchase an option to buy all of them. This would have cost more, but the costs would have been trivial compared to the benefits, not least that the lockdowns of the second half of 2021 could have been avoided, or at least not been as long, given that exit from lockdowns was tied to vaccination rates.

A good analogy is betting on a horse to win a race. If you must back the winner, there’s only one strategy, and that is to bet on every horse in the race. This can be expensive, but if you gamble and don’t back the winner, it’s even more expensive.

There was also a feeling within government that because we didn’t have many cases in early 2021, there was no rush to vaccinate, and we could sit back and observe how the vaccine rollout was going in other countries. And to make matters worse, comments made by some officials about the (in fact, very small) risks of the AstraZeneca (AZ) vaccine made significant numbers of people not get vaccinated with AZ and instead decide to ‘wait for Pfizer’, which was in short supply at the time. As it turned out, the Delta variant of the virus entered the country in mid-2021 and there was indeed a need to rush to vaccinate.

Rapid Antigen Tests

More recently, we’ve experienced the non-availability of Rapid Antigen Tests (RATs). These were only approved by the regulator, the Therapeutic Goods Administration for use from 1st November last year, far later than they could have been and this was after a campaign against them by the Royal College of Pathologists of Australasia, on the irrelevant ground that PCR tests are more accurate. So just when the Omicron variant of the virus hit in late November, RATs were (and still are) most needed, because the number of people needing testing far exceeded the capacity of the PCR testing systems. Australia was then undersupplied, with no prospect of getting any RATs quickly, because the whole world wanted them. The result was that people, unsure whether they were infected, or whether other people in the community were infected, locked themselves down instead of being out in the community earning a living and spending their incomes. The procurement of RATs was an own goal that could have been avoided.

Summing up

A one in 100-year global pandemic by definition is something no one alive – certainly no current adviser or decision-maker – has seen before. No one knows what is coming next. When bad things happen, like the emergence of the Omicron variant, they happen quickly. If key decision-makers are unprepared, they are immediately put in react-to-a-crisis mode. This leads inevitably to ad hoc decision making, complete with rules that can be inconsistent and difficult to understand.

Policy processes, decisions and outcomes would most likely have been much better if some of the tools that economists use every day, such as cost-benefit analysis and real options analysis had been used extensively. The techniques of operations research could also have been put to good use. Public health, particularly in an emergency, is the quintessential public service – there is no market mechanism – that requires a central planner and authority to make decisions. But this decision-making, if it is to be effective, needs a coherent framework.

Finally, on a positive note, because of policies that have been implemented effectively and despite those that have not, compared to most countries, Australia has done well. The pandemic was unprecedented and there was no textbook to guide anybody. When the pandemic has passed, we do need a thorough review of how it's all been handled, so that next time we do better.

References

^[1] Veronica Guerrieri et. al. 'Macroeconomic Implications of Covid-19: Can Negative Supply Shocks Cause Demand Shortages?'

Forthcoming American Economic Review.