ABC AFTERNOON BRIEFING WITH PATRICIA KARVELAS
17 MARCH 2020
PK: I’m joined by the former Prime Minister, Kevin Rudd, who of course devised the stimulus package for the global financial crisis. Kevin Rudd, welcome.
KR: It’s good to be with you.
PK: Now, the Federal Government says the crisis brought on by COVID-19 will be worse than the global financial crisis because so much economic activity is grinding to a halt because of people’s health concerns. Do you agree, is it worse?
KR: Well, the bottom line is the Government is confronted, as is the nation, with a double-barrel crisis. At its heart, it’s a public health policy crisis because of the essential nature of the pandemic and as a consequence, it is also an economic and prospectively a financial crisis as well, for the country. You don’t get to choose what sort of crises you have to deal with in Australian public life or international public life. This one is complex. It is difficult to reach firm analytical conclusions about its trajectory, but you know something – most crises are always conducted through the fog of war and under these circumstances you have to make the best policy judgements possible in order to maximise the interests of the Australian people.
PK: The Federal Government is preparing to unveil another round of stimulus. This one is likely to be aimed at industry. What measures should they be looking at? If you were still Prime Minister, what do you think they should do?
KR: I think Patricia, it’s really important to get your analysis of this crisis right. I think at its heart, it’s a public health crisis. I’ve been critical about the tardy nature of some of the measures which have been taken by the Government in terms of social distancing, in terms of other measures in public health, because until we have an objective handle on the containment of this crisis, then the subsequent economic and financial problems will unfold from there. So that’s the cornerstone. Then separately on the economy, what I’d say is this – you see, the first thing I think we need to look at is just the quantum of economic contraction going on around the world.
China is going to be in recession in the first quarter, I cannot see it returning to normality in the second quarter of 2020, Japan is in recession, South Korea is heading that way, so is Europe and so is the United States. Under those parameters, it follows, therefore, that a recession in Australia is bearing down upon us. Therefore, on the quantum of stimulus activity necessary, my recommendation to the Government would be to be much more, as it were, hard-line than what we’ve seen so far. One per cent of GDP, the measures announced the other day, frankly, won’t touch the sides. It’s going to have to be much more significant than that, if you are going to look at an effective global contraction of 3 to 4 percentage points of GDP – the multipliers are fairly clear – I would therefore encourage the Government to be much more aggressive in its response.
PK: When you say 1% of GDP won’t touch the sides, clearly the Government – I don’t know if it’s the same conclusion – but partly, they’re scaling it up already, literally within days of the first announcement. What percentage of GDP should they look at?
KR: I don’t have available to me the econometric modelling which the Government has in terms of the economies impacting on Australia. But I have written just yesterday in The Guardian that this is beginning to assume the proportions of the global contraction we faced in 2008-9. So, you are going to have something which is minimally several points of GDP, effectively spread over a range of measures, not just targeting one sector of the economy, and spread over several quarters in order to have a cascading effect. If you analyse the measures, we took in 08-09, that is why ultimately it was effective in avoiding recession. I would not be adopting the psychological posture if I were the Government, that mass unemployment and therefore significant and deep recession are somehow unavoidable. We didn’t take that approach. You’ve got to get in there and fight and you still have a bunch of fiscal policy measures and still some room for action by the Reserve Bank by way of either classical measures or by way of quantitative easing or by way of what’s called repo, in order to keep liquidity alive in the economy and flowing.
PK: Does the nature of this crisis and the fact that the basic movement of people needs to be limited mean the Government has fewer options to stimulate the economy than you did, for instance, in the GFC?
KR: The truth, Patricia, is each crisis is different. This is qualitatively different and some of the elements overlap. You are right in this part of the analysis – that what you are facing is a cascading set of problems arising from first of all a supply-side crisis, interruption of global supply chains affecting Australian retailers. Secondly, a cascading demand-side problem, arising from things such as the potential for rising unemployment and also the collapse of consumer confidence, other than in panic buying. But, I would argue that the core of the economic problem facing the Government is this – it has to be wrestled to the ground – which is, how do you keep businesses afloat for the next couple of quarters when they are experiencing a cash flow crisis? Because if you let those businesses simply go, whether they are large businesses, medium or small, then the impact on employment and therefore unemployment benefits and therefore on the budget, will be huge – quite apart from the social catastrophe – therefore the bulk of the public policy work in my argument should be addressed at how do you extend credit to firms who are being adversely affected by the crisis to keep them afloat temporarily? I looked, for example, at measures taken by the government of Germany announced in the last 48 hours, whereby through Germany’s state development bank, they have extended credit with no upper ceiling to firms directly affected by the crisis, so that they are preserved until something approximating more normal business conditions return – otherwise it’s a form of economic Darwinism – you just sort of throw them to the wolves – I don’t think that’s the right approach in the current circumstances.
PK: Qantas and Jetstar will slash capacity on international routes by 90% and domestic by 60% until May. Of course, they could review that and continue it. Should the Government be prepared to bail out the airline industry?
KR: My comments would be more addressed to all firms, not just cherry-picking. Obviously, those in the civil aviation business, more generally transport, tourism, hospitality and prospectively education. Remember the balance sheets of our major public universities and private training institutions, all these are relevant, as are SMEs. The millions of them out there in the Australian economy who are now feeling the direct pressure on their cash flow arising from this contraction – radical contraction – in trading conditions. So, what I would argue is a more general policy instrument. Look carefully at what the Germans are doing, for example. While China, for example, is a different set of economic circumstances to Australia, I find their analysis of their economic problem enlightening in this sense, that they have also concluded that their job is to keep businesses afloat. So, their direction to their banking institutions is to extend credit forbearance for the next six months to those institutions. Now, the policy question arising from that is – to what extent can, for example, the Australian Treasurer jawbone the Australian banks into providing, shall we say, relaxed and flexible credit conditions to businesses finding themselves in cash flow difficulties at present under the crisis. There will be a limit to what the banks can put on their own balance sheet here. Therefore, governments must step in with a form of – shall we say direct government support to the banks and financial institutions, extending these lines of credit to firms.
It may, in fact, mean that the government, by extending these lines of credit, ultimately is embarking upon a form of assets program which ultimately gets repaid through the banks, or to the government directly, so that whereas the government will take a medium-term hit on its own balance sheet, longer-term they get repaid, directly or indirectly, by the firms who are supported by this sort of intervention. It is that sort of creative policy fix – given the huge hit on very good businesses – big and small – by this massive coronavirus crisis that I think is necessary before we look at the longer-term measures of how you are going to resuscitate demand once we have survived these firms through triage in the short to medium-term.
PK: Before I let you go, Kevin Rudd, you mentioned – you know, some of the critiques you have about the way social distancing has been enacted. I would like to explore that with you, just the health dimensions. Are you uncomfortable with the policy Australia has embarked on? We have got now this cap of 500 people in terms of the gathering that the government says should not go ahead. It’s reviewing that tonight. We might know more tomorrow. Schools are still, of course, allowed to go ahead. Do you think those things should change?
KR: My general critique of the government’s performance, Patricia, at a time when most of us in public policy and in politics, former or serving, wish to be constructive, is that there is a pattern in terms of the government’s response so far of being too late. The measures being too much half measures, and, in fact, adopting a more passive posture than we have seen by other governments around the world – both in public policy health responses, as well as economic and financial policy responses. Your question goes to the public health responses. My argument would be that I have observed in Australia that we have had, for example, us not leading the public policy debate internationally, but following and often following slowly. We have seen that in terms of the absence of an early public information campaign, we’ve seen it through confusing messages on social distancing and public events. And frankly, when the Commonwealth medical officer on Sunday on the ABC program Insiders gave, I thought, an extraordinary answer on the continued viability of handshaking at a time when no public health authority in the rest of the Western world was advocating the continuation of handshakings. These sort of things cause me to really doubt elements of what has been done here. I would strongly recommend to the government a much more aggressive, forward-leaning posture across the board. And, frankly, any discussion – direct or indirect – about this frankly social Darwinist approach to so-called herd immunity should just be pushed right off the table. Let’s get on with the business of minimising contagion, and as others have said, flattening the curve of this crisis, so that our front-line workers in the public health and hospital system can deal with it in the most effective manner possible, thereby hastening economic recovery.
PK: Do you believe schools should be shut down? Would you be comfortable sending your grandchildren to school? It is not your call, but you do have grandchildren.
KR: I’m glad you have already aged me, Patricia in terms of having school-aged children. I do have kids at university still. I certainly have grandkids at school. My overall argument on those two questions, again, is to push in the direction of the more aggressive approach. For example, in the United States, where I live and work, Harvard University last week shut its doors, beginning with the Kennedy School and extending across the entire university. They have migrated their programs online. That isn’t impossible for Australian institutions.
As for schools, I was taken earlier, Patricia, by your own recommendations that you put to the Minister by way of discussion, which is if the core policy concern about keeping our schools open is to ensure that it doesn’t fundamentally disrupt the ability of health workers to continue to work in our public health institutions across the country, then let’s tailor the schools down, as you just suggested before, to a manner whereby they can be run at a much more core and fundamental level. But secondly, also, if we are to shut schools down to a core level, there must be an effective public education campaign which says, “Kids, if you’re at home, you do not go and give your grandparents a cuddle.” Because If the morbidity rates amongst people over 70 – I’m not in that category, Patricia – but if you’re over 70 they are around about 15%, and if kids who are less likely affected with adverse symptoms go racing home to grandma and grandpa, then we have a problem. There must be public education and campaign to do that. Core retention within the school system to deal with the problems of public health workers, but on the rest of it, my overall advice, both on economic measures and public health measures, is to become infinitely more forward-leaning and aggressive across the board than we have so far seen in Australia. Because my fear – I wrote recently, about a month ago – that what we saw in China in January and February we would see in the rest of the world in March and April. Regrettably, that’s come to pass. What I’m most concerned about in our country, Australia, is that what we see in Europe unfolding before our eyes, is what we see in Australia in the weeks ahead unless we become much more aggressive in our public health and economic policy measures.
PK: Kevin Rudd, thank you very much for joining us.
KR: Good to be with you, Patricia.
PK: That is the former prime minister Kevin Rudd. We are practicing all of that social distancing. He joined us on a Skype line. Very deliberately indeed!