Extreme Economics and Ensuring the Basics During the Covid-19 Crisis.
The lack of real time data about our economic situation is frustrating, especially in this digital age.
It is obvious that our economy has taken a massive hit particularly in the tourism and retail sectors. Tourism accounts for about ten percent of our GDP. But it should be noted domestic tourism accounts directly and indirectly for over half of that.
Our economy has experienced major trauma in the past month. An economy has two key functions. To use resources to make stuff for people to consume either locally, or as exports. This total output is measured by GDP. Last year our GDP was about USD $ 215 billion. The level of output in an economy largely determines the level of incomes and employment in the economy.
The other core function of an economic system is to determine how the output and incomes are distributed among people. This is the most urgent economic problem confronting us now. We can meet our basic needs as a country but we need to ensure everyone has access during this crisis.
New Zealand tends towards being a market economy with a significant government sector. That means output is largely determined by price signals in various markets telling firms what to make. The key motivator for producers is profit.
It is a very effective system in normal times. Not perfect, but generally effective. Stuff turns up in supermarket shelves, in petrol stations and appliance shops and liquor stores as though an "invisible hand" is coordinating everything. It's an amazing process that we take for granted in normal times. In extreme times such as war or pandemic it is quickly laid bare. Yet amazingly the core essentials in our economy are still getting through. The basic output and supply chains in our economy are proving resilient. The panic shopping will subside as people become assured of this.
It is the second aspect of our economic system that is the immediate issue. In normal times the ability of people to get stuff is largely determined by their ability to pay the price. This is determined by people's incomes.
The current economic trauma is dramatic in speed and scope. Output of stuff has likely plummeted. Incomes have plummeted, unemployment has skyrocketed. Unfortunately accurate timely data is lacking.
But our cool little economy is still able to produce our basic necessities. Food, water, electricity, petrol, beer, wine. We are capable of meeting everyone's basic needs during this crisis.
The big issue is determining how this output is to be distributed during this crisis. With the immediate widespread loss of jobs and incomes there needs to be an urgent and simple living allowance for individuals and families who have taken the sudden hit. They need the credits in their accounts to pay for the basics. It needs to be simple, fast and effective to meet their basic needs. The wage subsidy scheme was a great start. But this assumes firms still have some positive cash flow. Many don't.
Our economy can produce the stuff. It's the distribution of the basics that is the immediate economic issue during this crisis.
Peter Lyons (M.Comm) is a regular columnist for the Otago Daily Times, teaches scholarship-level Economics and an author of several New Zealand economic texts. His inspiration often comes after a dram of whiskey. Just one mind you. So if you're ever stuck in a room full of economists, grab the seat next to him. For a conversation peppered with wit, wisdom and weirdness.
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