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The destruction in this economy? It could have been prevented

It must be interesting for business teachers these days.

When they get the message, they are likely thinking, “This will be a great example for my next class.”

The last week has been rich in material for class.

There was a discussion about “incentives,” we heard concerns about a “double-dip recession,” and we saw a Reserve Bank governor speak about the need for stronger “aggregate demand.”

But are we looking at some others?

Hopefully these will bring the textbooks to life – and help you understand the world around you.

What does it mean to be a good business manager?

The Reserve Bank of Australia Governor Philip Lowe appeared before a parliamentary committee on Friday.

He told the committee that it was very important for everyone in Australia to get vaccinated as soon as possible.

He said the sooner everyone was vaccinated, the less economic damage we would suffer and the sooner we could reopen the economy.

“I had my first take from AstraZeneca. I’ll get my second in two weeks,” he said.

It was a great example of teaching.

Lowe said the Delta eruption in the greater Sydney area and recent lockdowns in other states had caused major economic damage.

In fact, economists have even put a figure on the damage.

A few weeks ago the Commonwealth Bank economic team sent this warning to its clients:

“The extended lockdown in the greater Sydney area will change the course of the Australian economy in the coming months.

“Before that, the Australian economy should recover strongly and the unemployment rate should fall well below 5 percent by the end of the year.

“This idyllic scenario did not materialize, however, and the economy hit a major pothole before we reached the vaccine finish line.

“A sharp decline in gross domestic product (GDP) in the third quarter of 2021 is now an accomplished fact.

“It is the inevitable consequence of the shutdown of large parts of the economy. Employment will fall and unemployment will rise.”

The CBA economics team has estimated that Sydney’s lockdowns cost approximately $ 1 billion per week in lost activity during construction, and $ 2 billion per week when not.

For the September quarter, they estimate that $ 13 billion worth of economic activity at the national level would be destroyed (as some states will still see positive growth).

“The introduction of the vaccine is incredibly important to the economic outlook,” they warned.

These numbers are huge.

And Steven Hamilton, The Blueprint Institute’s chief economist said the current situation would be very different if the majority of Australians were vaccinated by now.

He said the introduction of the botched vaccine taught many economic lessons.

What is a “false economy”?

One lesson has to do with “false economies,” he told the ABC.

A false economy is a situation where you think that you will save money by doing something, but will have to spend more money over time than you thought you “saved”.

Mr Hamilton has been a critic of policymakers for failing over the past year to spend as much money as necessary and to do whatever it takes to get enough vaccines to everyone at the earliest possible opportunity.

Steven Hamilton, chief economist at the Blueprint Institute, says the botched vaccination rollout resulted in huge economic costs.

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In April, if vaccination rates were still so low, he warned that the cost of further lockdowns this year, along with the closure of international borders in 2021, would wreak enormous economic damage.

He cited the example of poorly sourcing Pfizer vaccines to make a bigger point.

“Ordering just 10 million Pfizer cans initially instead of the 50 million needed to cover our population has saved the government around $ 600 million at US prices,” he wrote with friend Richard Holden in April , Professor of Economics at UNSW Business School.

“But that’s only a tiny fraction of what our economy will lose in the resulting delay [in vaccinations] – a false economy, if ever there was one. “

‘Waste’ isn’t always bad

Mr Hamilton said there was another lesson related to false savings.

Waste isn’t always bad.

He said policymakers might have been put off last year by the idea of ​​”wasting” money securing as many vaccines as possible or building quarantine facilities, but from an economist’s point of view, in this situation it would have been beneficial To have waste.

“You could say, ‘Oh, I got auto insurance and I haven’t had a car accident, what a waste,'” Hamilton told ABC.

The RBA says we are entering a difficult period where the economy will shrink

a man on a podium

RBA Governor Phil Lowe says Australia’s economy will shrink in the coming months, and a lot depends on our national vaccination rate.

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“But the much worse situation, of course, is when you don’t take out insurance and end up in a serious accident.

“So you’d think buying eight times as many vaccines as we needed and getting factories to actually make them would be wasteful.

“But because the benefits were so much greater than the costs, and because the virus was such a risky thing, that redundancy isn’t wasteful. It’s actually very prudent.”

He said it could have prevented the much greater waste we are seeing now that capital is still being destroyed across the country and unemployment is skyrocketing again.

Economic management is more than a penny

Hamilton said that these types of prejudices (false economies and fear of waste) can cause real economic damage, and whether or not policymakers are “good economic managers” is about much more than their ability to run a budget balance.

“Our decades-long obsession with pennies really bit our asses,” he said.

“It’s an accounting mindset. But you shouldn’t give an accounting mindset to the government, but an economic mindset that takes into account a wider range of factors.”

Mr Hamilton said he did not want to hook into the NSW-Victoria lockdown wars and it appeared that NSW had developed the ability to keep track of small outbreaks of the virus with its contact tracing.

But he believes NSW underestimated the Delta strain, and considering how much more contagious it is, it shows why previous vaccinations would have helped everyone in the country.

“If someone had said to me last year, ‘Oh hey, next year COVID will be twice as contagious’, I wouldn’t even have thought of it,” he said as an example of the nature of the risk.

He said that experience showed why it was so important to properly prepare for different risk scenarios.

“Being stingy is not good economic management. They are not the same,” he said.

“The consequences of being stingy are often minor, but in this situation the consequences are incredibly strong.”

They are important lessons for the classroom.

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