Costly but important lessons from the pandemic: policymakers have more tools than they once thought

It would be gauche to say that Australia has “had a good pandemic”: the death toll, even if much smaller than elsewhere; the economic disruption; the miserable impacts of lockdowns, especially on the young, are all part of the horrific cost of an historic crisis.

But the last 12 months has blown up the Australian economy, and the thinking about how to manage it, in ways that can only do immense good. Our policymakers have abandoned old ideas and embraced concepts that were anathema to them less than two years ago.

At a terrible cost to lives and health here and a nightmarish toll overseas, the Australian economy may actually emerge from the crisis in better shape — and with a governing class wiser and with more tools for future crises.

As a result, the big risk of returning to a pre-pandemic normal — that we’d go back to tepid growth, wage stagnation, a deficit obsession and lazy, self-centred business — might be avoided.

While the decision may have been driven by political imperatives, Josh Frydenberg’s fiscal reversal last week in favour of more support for employment growth, and the aim of pushing unemployment well below 5%, now finally puts him on the same page as the Reserve Bank on Australia’s overall economic strategy.

It looks as if, for a second budget in a row, the government will be unconstrained by the old mantra of debt ‘n’ deficits, and prepared to lavish spending on the economy to support jobs, complementing a highly stimulatory monetary policy aimed at getting unemployment down to lows not seen since the mining boom of 2007.

All in the name of achieving a labour market tight enough to force wages growth on unwilling employers.

For most of corporate Australia, and other sectors like agriculture, the response when particular labour markets have tightened in recent years has been to pick up the phone to a Financial Review journalist and dictate a piece demanding more cheap foreign labour or complaining about dole bludgers, rather than do what the market dictates — offer higher wages to attract workers.

We have good reason to suspect the government’s bona fides on wages growth — it is still punishing public servants with a real wages freeze, opposing minimum wage rises and demonising unions. But on fiscal policy — if Frydenberg is to be believed — it will walk the walk as well as talking the talk. We will not, it seems, be making the mistake the Europeans and the Americans made after the financial crisis in 2008-10, of racing to austerity after the initial recovery from the crisis.

And while corporate Australia has rightly copped flak for keeping JobKeeper handouts, the pandemic proved the kind of kick up the backside a lazy business community needed. Facing an existential threat from lockdowns, many businesses displayed a decidedly unAustralian spirit of innovation. In a few short months, there was a massive relocation online. It’s only a couple of years since the dominant narrative in Australian retailing was that Amazon would arrive and smash the locals. But Amazon is now just one player in a business ecosystem that has rapidly discovered that online retailing is crucial in a world prone to lockdowns.

This isn’t just about better websites. The resulting boom in online retailing continues and major investments are now being made by retailers and property companies in warehouses and distribution centres.

The much-hated major banks also proved crucial partners in the response to the pandemic, deferring mortgage repayments and taking a significant hit to their profits — and were rewarded with a surge in savings from Australians. Mortgage repayment deferral is now established as a tool for the future for banks and financial regulators. That means that a “housing crisis” — a scenario of plunging property prices long touted by many perma-pessimists as a persistent threat to the Australian economy — no longer holds the same threat as it used to: major financial institutions and regulators now have a tested and successful crisis management tool to deploy.

And while iron ore miners are continuing to enjoy extraordinarily high prices — with direct benefits for the Commonwealth and WA coffers — companies have worked out that the materials needed for a renewables-based economy will be a critical area of investment for Australia. Copper, nickel and some minor metals will be boom areas for our miners — BHP, Rio Tinto, Oz Minerals and Newcrest are already looking to spend billions of dollars on new mines and processing facilities in copper, gold, sliver and nickel. Lithium is plentiful and Australia is now one of the top producers in the world, with more expansion planned.

Scott Morrison and Angus Taylor might want to stop renewables, but corporate Australia has worked out which way the global economy is moving.

The Reserve Bank has also undergone a rapid transformation. In November 2019, governor Philip Lowe discussed quantitative easing and other tools of “unconventional monetary policy”, having chaired an international review of them. Such tools had never been employed in Australia and Lowe’s tone was mildly sceptical: he thought any benefits came with negatives and side-effects. But he was not dismissive, except of negative interest rates, and of purchasing assets other than government bonds.

Within four months, Lowe had embarked on what for Australia was a radical program of quantitative easing as part of what he called building a bridge to the other side of the pandemic.

That’s another of the new tools that Australian policymakers now have. In fact, we’ve substantially expanded our understanding of how to deal with an economic catastrophe: turn the fiscal taps on full to support employment and get wages growing. Go as hard an necessary on monetary policy to preserve liquidity and keep bond yields down, even at the risk of sparking an asset price boom. Encourage banks to pause mortgage repayments until the worst passes. And keep the stimulus going even as the recovery takes hold.

We can be sure that there will be future economic crises. But now we can also be sure that policymakers have a bigger arsenal to deploy against them. It’s been secured at a terrible cost, but that will stand us in good stead in coming decades.