Month: April 2020

Flattening the curve vs (near) eradication

John Quiggin54 Comments

Here are some comments I’ve written in a rapid response to Brendan Murphy’s recent press conference. (I haven’t yet seen even the summary of the modelling that has apparently been released, just a picture of flattened curves.)

The idea of “flattening the curve” is fundamentally misleading, since it implies that most people will be infected until herd immunity is achieved, while the number of cases remains within the capacity of the health system. But assuming spare capacity of 2 beds per 1000 people, and 20 per cent of patients requiring treatment, we would need at least five years for herd immunity to be achieved. Optimal policy is to aim for near-complete eradication, then maintain sufficient distancing to ensure local outbreaks don’t spread. We will need quarantine for international arrivals until vaccination is general, or until other countries achieve near-complete eradication.


The main insight from economics is derived from option value concept. Better to adopt stringent measures early and relax if they turn out to be excessive than to move slowly and risk widespread community transmission.

Australia’s post-war recovery program provides clues as to how to get out of this

John Quiggin40 Comments

I’m running behind, but here’s my latest piece in the Conversation. Although the situation is very different from that of 194t, this, from the White Paper on Full Employment is as relevant as ever

Despite the need for more houses, food, equipment and every other type of product, before the war, not all those available for work were able to find employment or to feel a sense of security in their future.

On the average during the twenty years between 1919 and 1939 more than one tenth of the men and women desiring work were unemployed. In the worst period of the depression, well over 25% were left in unproductive idleness.

By contrast, during the war no financial or other obstacles have been allowed to prevent the need for extra production being satisfied to the limit of our resources.

Under emergency conditions, all sorts of things that were said to be impossible are suddenly found to be necessary, and the objections raised against them turn out to have been excuses for serving the interests of the well off. That’s the case for both Universal Basic Income and a Job Guarantee, both of which now exist in embryonic form.

Dump inflation targeting

John Quiggin55 Comments

Yesterday, I pointed out that the first instalment of the rescue package could be financed by cancelling the Stage 3 income tax cuts legislated for 2024-25. Today, the same suggestion is on the front page of the SMH. Morrison is apparently resisting the idea, but that can’t last long.

Trying to keep one day ahead, I’ve turned my mind to how the Reserve Bank should operate during and after the crisis. The first step is to abandon inflation targeting once and for all. The policy of using small interest rate adjustments to keep inflation in a range of 2-3 per cent made sense in the policy context of the (spurious) Great Moderation, when the target appeared consistent with maintaining unemployment at a stable level of 5 per cent or so, assumed to be the lowest the economy could sustain.

That all fell to pieces with the GFC. Inflation targeting, which did nothing to stop asset price bubbles, was a significant contributor to the crisis. Various ideas to address this problem were floated, but it ended up in the too-hard basket.

In the aftermath of the GFC, most central banks pushed their key interest rates down to zero. Even where this didn’t happen, as in Australia, inflation remained persistently below the target range, a problem that hadn’t been contemplated when the policy was first introduced in the 1990s, and the big concern was a resurgence of the inflation of the 1970s and 1980s.

It’s now obvious that we will never return to a world where inflation targeting makes sense. But what should replace it?

The first step should be a re-ordering of the Reserve Bank’s objectives to focus primarily on full employment rather than price stability. One way to implement this would be to target the level and growth rate of nominal income. My suggested target would be a 7 per cent rate of nominal growth, ideally made up of 3 per cent real growth* and 4 per cent inflation. The idea of the nominal target is that, if real growth falls below the target, the Reserve Bank loosens monetary policy and accepts higher inflation.

A 7 per cent growth rate would imply a doubling of nominal income over a decade. That in turn means that if we end the crisis with, say, debt equal to 60 per cent of national income, and balance the budget (on average) after that, the debt to income ration would fall to 30 per cent by 2030.

  • In the longer term we should be looking at taking the benefits of technological growth in the form of more leisure rather than more output. But I haven’t had time to do the analysis on that.