An earthquake reveals the weaknesses in roads, buildings and houses. COVID-19 is doing the same thing with the Australian economy, revealing fault lines that have festered for years. They have made COVID-19's economic hit more severe than it had to be, and they desperately need to be fixed. But not everything is broken. Being able to distinguish what should and shouldn't be changed is vital.
Let's start with the things that need changing. One of the biggest cracks revealed by COVID-19 is an increasingly casualised workforce. More than 2.6 million Australians are in casual employment with no paid leave. This was bad in normal times because it meant increased uncertainty for households, resulting in less spending, less labour mobility and fewer people taking the risk of starting a business or going for a new job. But when COVID-19 struck, this casualised workforce became an even bigger liability. More people in insecure work meant more people losing their jobs, exacerbating the downturn. This problem has come home to roost, leaving the government scrambling to extend the already expensive JobKeeper payment to the casuals who were originally excluded.
The same is true for Australia's social safety net. COVID-19 revealed what economists have been saying for many years: that payments like Newstart (now called JobSeeker) are grossly inadequate. The human cost of this neglect has been substantial. But economists warned that the neglect also meant that Australia had weaker "automatic fiscal stabilisers" - programs that routinely increase government spending when the economy is slow and then ease that spending when the economy strengthens. JobSeeker contributes to this process because it is paid to unemployed people, whose numbers grow when the economy weakens. But the decline in the generosity of these payments over many years (because they are indexed to inflation instead of wages) has made our economy less resilient to shocks and less able to bounce back. Again, this has come home to roost: the government has been forced to step in, increase the payment and foot the bill.
Another crack revealed by COVID-19 is debt. The problem isn't government debt: Scott Morrison and his colleagues could increase spending by three-quarters of a trillion dollars and we would still be average among G20 countries. It's the high level of household debt in Australia that has made the crisis worse. As I wrote last year, weak balance sheets mean households have smaller buffers. As a result, the downturn in household spending has been sharper, and that has also required a bigger government response.
COVID-19 has also revealed how deepening distrust in government and institutions over time has made it harder to manage the pandemic. The Edelman's Global Trust survey asked Australians to rank government, business, the media and non-government organisations by how competent and ethical they were. None were found to be both. According to those surveyed, businesses are competent but unethical. NGOs are ethical but not competent. And the government and the media were neither.
Forty-five per cent of Australians distrust these institutions. Yet, at various points in the crisis, the government and the media seem puzzled about why Australians aren't listening to them. Inconsistent messaging and the lack of co-ordination between the federal and state governments - another serious long-term challenge exposed by COVID-19 is the weakness in our federation - has not helped.
If the old saying "never waste a crisis" holds true, then there are plenty of ways we could use the COVID-19 pandemic to fix some of these problems. Decasualising the workforce, strengthening automatic stabilisers, boosting the safety net, better managing household debt, increasing trust in institutions and strengthening the federation are at the top of that list. The government's rhetoric of a "snap back" to normal times shouldn't be used as political cover for ignoring these problems.
But not everything needs fixing. Calls have already been made to change things about the Australian economy that are not only vital to our long-run economic interests but are playing a critical role in supporting our recovery. Two things stand out: trade and foreign investment.
The most fundamental automatic stabiliser Australia has is its floating exchange rate. When the economy is weak, the exchange rate falls, making our exports and assets cheaper than those from other countries. This boosts our exports and increases foreign investment, both of which play a vital role in supporting the Australian economy and will be crucial to Australia's recovery.
It is therefore perplexing that the government and a growing number of commentators are going out of their way to try to weaken these benefits. The government announced last week that it would make it harder for foreign investment to flow into Australia, arguing that the economy is weak and needs to be protected. This is silly. It shuts off a vital source of growth, particularly given investment has been so anaemic for so long, and it ignores the fact that making assets cheap during a downturn is exactly why we have a floating exchange rate in the first place. It is a feature of our economic system, not a flaw.
The same is true for trade. A weaker Australian dollar is a boon for Aussie exporters. Once economies are reopened, a vital source of our recovery will be the goods and services bought by our trading partners, the return of tourists to our shores and the return of students to our universities. Calls for Australia to come out of COVID-19 less trade-dependent are a recipe for disaster. Those who advocate it should be held accountable for the slower, longer recovery that will follow.
Although misguided, fears of an open economy are understandable in the current environment. Open economies have lifted billions of people out of poverty and have immeasurably increased the living standards of Australians. But they also mean that global shocks and even problems in one country can quickly become a problem in ours. This is the downside of openness, and we are currently living it. But while some wariness is understandable, this should not blind us to the long-run benefits of openness, particularly when it will be so vital to our recovery.
Being able to distinguish between the things we should change in the Australian economy and the things we shouldn't will shape Australia's recovery from COVID-19. Now is not the time for policy on the run. .
- Adam Triggs is Director of Research at the Asian Bureau of Economic Research at ANU, and a regular contributor to Inside Story, where this article first appeared.