Morrison and the medicos must also avoid complacency

They say Australians always respond well to a crisis, and it seems it's true. Even in these days of disposable leaders, Kevin Rudd deftly stopped the global financial crisis from sucking us into the Great Recession, and now Scott Morrison has got on top of the corona crisis in a way few would have expected. His approval rating has soared. But I still wouldn't want to be in his shoes.

Why not? Because, as an old econocrat explained to me long ago, if you dispose of a crisis with too much ease – without a titanic struggle – you get precious little gratitude from the voters. If it was that easy to fix, it can't have been much of a crisis in the first place. Indeed, all that money you spent – well, most of it must have been a waste. That's the very way his political opponents have sought unceasingly to denigrate Rudd's unbelievably skilled performance in 2009.

And now Morrison faces the same risk. Everyone's saying he – along with the premier cats he's been herding – has done surprisingly well in controlling the outbreak. But that's not true. The unvarnished truth is that – if you'll forgive the expression – he hasn't just done well, he's killed it. He set out merely to "flatten the curve" but in fact has driven it down almost to zero. And done so with just 80 or so people losing their lives so far.

In the jargon of the epidemiologists, he and the premiers have succeeded in getting "R" – the average number of other people infected by someone who's contracted it - below 1, meaning it's dying out.

Utterly uncharacteristically for a politician of any stripe, Morrison has sought to play down this achievement. Why? Because the whole world has a year or years to go before the virus is tamed and, in the interim, some mishap on our part could cause the virus inside our borders to become undead.

That's why Morrison and his medico advisers live in fear that any loosening of the lockdown could lead us to become "complacent" and flip to the opposite extreme, stopping all social distancing.

But keeping us locked down as tight as possible for as long as possible offers no solution to Morrison's challenge as our leader. That's because, though we care deeply about saving lives, we also care about saving our livelihoods. Our success in getting on top of the virus has been bought at the cost of shutting down most of the economy, with hundreds of thousands of workers losing their jobs.

Morrison's problem is that, because it was so relatively painless, his remarkable success in driving out the virus will soon be forgotten, whereas the continued dysfunctional state of the economy – the way-high unemployment – will be upmost in people's minds come the election in 2022.

And, even now, his critics – mostly from his own side – are concluding that his measures to deal with the virus grossly overestimated the size of the problem and have decimated the economy for no good reason.

For instance, we were terribly worried about the risk of hospitals being overwhelmed by patients who couldn't get proper treatment to prevent them from dying. We had to delay the virus' spread while we more than doubled the existing number of 2200 intensive care beds. Fine. Last time I looked, there were 43 virus victims in ICU.

But such criticism is just being wise after the event. It forgets that we had to respond quickly and forcefully to a new virus, the characteristics of which we knew next to nothing about. The best we had to go on were numbers from China, which proved much worse than our own experience.

The medicos' original modelling assumed Wuhan's R – reproduction number – of 2.68, whereas their more recent modelling using Australian numbers shows we started with Rs above 1 only in Victoria and NSW, before falling below 1 in all states bar Tasmania.

Morrison's deeper problem is that the longer he keeps the economy locked down, the less there will be left to reopen. So avoiding complacency cuts both ways. You and I must not become complacent about hygiene and social distancing, but Morrison and his medicos must not be complacent about the enormous economic (and social) cost that our success in getting on top of the virus is inflicting on all of us.

The solution is to take advantage of our success in taming the virus by moving quickly to replace the sledgehammer measure of closing down most of the economy with the less economically damaging measures of much more testing, better tracing of people exposed to the virus, and jumping on any local outbreaks ASAP. The new app is a big part of this shift to less invasive cures for the disease.

These are the three things Morrison has been quietly saying we need to get organised before we consider easing the lockdown. But now he needs to move strongly in dismantling much of it while, naturally, retaining our closed borders.

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How would Jesus treat people on the dole?

Since it’s Easter, let me tell you about something that’s long puzzled me: how can an out-and-proud Pentecostalist such as Prime Minister Scott Morrison be leading the most un-Christian government I can remember? Fortunately, however, the virus crisis seems to be bringing out his more caring side.

Many people think being a Christian means being obsessed with sexual matters - abortion, homosexuality and same-sex marriage – plus, these days, their human right to discriminate against people who don’t share their sexual taboos.

But if you read the four gospels recording what Jesus did and said, one message you get is one rarely emphasised by his modern-day, generally better-off followers. Jesus was always on about the plight of the poor, and was surprisingly tough on the rich.

Jesus gave his followers a new commandment, that they love one another. “By this everyone will know that you are my disciples.” Asked who was the neighbour we should love as our self, he told the parable of a despised Samaritan, who rescued a man bleeding in a ditch while two upright church-goers “passed by on the other side”.

Jesus said he came to “proclaim the good news to the poor”. “Blessed are you who are poor, for yours is the kingdom of God. Blessed are you who hunger now, for you will be satisfied. . . But woe to you who are rich, for you have already received your comfort.”

To the rich he advised: “When you give a banquet, invite the poor, the crippled, the lame, the blind, and you will be blessed.”

Jesus blessed those who had been kind to others: “I was hungry and you gave me food, I was thirsty and you gave me something to drink, I was a stranger and you welcomed me, I was naked and you gave me clothing, I was sick and you took care of me, I was in prison and you visited me.”

When a young man asked Jesus what he must do to inherit eternal life, he said: “Go, sell what you own, and give the money to the poor, and you will have treasure in heaven; then come, follow me.” But the young man “was shocked, and went away grieving, for he had many possessions”.

All this compares badly with the actions of the Coalition government, in which Morrison has always played a senior role. As minister for immigration, he was more ruthless than Labor in turning away strangers who came by boat seeking asylum. Those who did make it were treated harshly, to ensure any further strangers got the message about how unwelcome they’d be.

A lot of people like to divide the poor between the deserving and the undeserving. Like Labor before it, the Coalition has pandered to this un-Christian attitude. It favours “lifters” over “leaners”. Morrison himself introduced the ethical code that only those judged to have “had a go” will “get a go”.

The deserving poor are people on the age pension; the undeserving are the unemployed, single parents and probably most of those claiming the disability support pension. I went out and found a job; what’s stopping them doing the same except their own laziness?

Labor always pandered to the widespread “downward envy” of the jobless, but the Coalition has doubled down, reintroducing work for the dole despite all the reports saying it does nothing to improve people’s employability, making people run down their savings and wait longer to be eligible for the dole, making people prove they’ve approached an unreasonable number of employers each fortnight and suspending their payment if they fail, or miss an appointment for any reason. Not to mention the "robo-debt" scandal.

The Coalition wants to control how people spend the dole by paying them by card rather than cash. It wants regular drug testing of those on the dole. And it has steadfastly resisted widespread public pressure to increase the paltry amount of the dole, even though Labor has finally been shamed into abandoning its own longstanding hardheartedness.

But now, however, having adopted the slogan “we’re all in this together” – one beloved of my co-religionists in the Salvos - in his battle against the virus, Morrison seems to have had a change of heart. Whereas Kevin Rudd studiously avoided including the unemployed in his two cash splashes, Morrison has included them with other welfare recipients in his two $750 payments.

His temporary “coronavirus supplement” effectively doubles the rate of unemployment benefits to about $550 a week. He must know that returning the dole to $40 a day after six months won’t be politically possible. Meanwhile, his temporary JobKeeper payment of a flat $750 a week undercompensates higher wage earners while overcompensating lower wage earners, including many casuals.

In all, a Christlike turn for the good.

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Some major contagions have nothing to do with you-know-what

It’s a long weekend so, though we’re barred from enjoying it in the usual way, let’s at least forget the V-word. How about a quiz?

Let’s say the government is preparing for the outbreak of an unusual disease (no, not that kind of disease) that, should we take no action, is expected to kill 600 people. The government could act to combat the disease in either of two ways.

If program A is adopted, 200 people will be saved. If program B is adopted, there’s a one-third chance that 600 people will be saved, and a two-thirds chance that no one will be saved. Which one would you choose?

If you chose A, congradulations. You’re in good company. When this psychology experiment is run, about 72 per cent of subjects favour A and only 28 per cent favour B.

But then the government consults the epidemiologists. Their advice is: forget A and B, and consider program C or program D. If C is adopted, 400 people will die. If program D is adopted, there’s a one-third chance no one will die and a two-thirds chance that 600 will die. Which one would you choose?

If you chose D, more applause. In laboratory experiments, that’s what 78 per cent of subjects choose, leaving only 22 per cent choosing C.

But if you look at the four options again you find that program A and program C are the same. Under A, 200 out of 600 are saved; under C, 400 out of 600 die. It’s just that A highlights the positive, whereas C highlights the negative.

That 72 per cent of subjects favoured A, but only 22 per cent favoured C tells that most of us instinctively favour the safer, more certain outcome. Program B, remember, contained a two-thirds chance that no one would be saved. This instinctive preference confirms economists’ conventional assumption that most people are “risk-averse”.

But a closer look also reveals that program B and program D are the same. Program B offers a one-third chance that 600 people will be saved and a two-thirds chance that no one will be saved, whereas program D offers a one-third chance no one will die and a two-thirds chance that 600 will die.

(If you can’t see that, remember that, in probability theory, the expected outcome is the possible outcome multiplied by the probability of it happening. So B is ⅓(600) + ⅔(0) = 200. And D is ⅓(600) + ⅔(0) = 200.)

But if options B and D are the same thing expressed in different ways, how come the experiments show only 28 per cent of subjects choosing B, but 78 per cent choosing D? It’s because, relative to option C, which offered only the certainty that 400 people would die, option D offered a one-third chance that no one would die, and most subjects thought that was a risk worth taking.

This shows that, while it’s generally true that most people are risk-averse, as conventional economics assumes, a more powerful human characteristic – which conventional economics ignores – is that most of us are “loss-averse”.

A key insight of behavioural economics is that we hate losing something much more than we love gaining something of the same value. So much so that, surprisingly, we’re willing to run risks to avoid any loss.

If you hadn’t noticed, when you look closely you see that all four options offered the same “expected value”: 200 people saved, 400 lost. If everyone had realised this at the time, they should have been equally divided between the options.

Why were we so sure that A and C were much more attractive that B and D? Well, one possibility is that most of us aren’t much good at maths. But the more important explanation is that we are heavily influenced by the way a proposition is presented to us – by the way it’s “framed”, as psychologists say. The same proposition can be packaged in a way we find attractive or repellent.

This, too, is a truth that conventional economics knows nothing of, but behavioural economics – the school of economic thought that uses psychology to throw light on economic issues – has brought to economists’ attention.

Putting it differently, the choices we make are heavily influenced by the context in which we make them. This is one of the key arguments advanced by Robert Frank, an economics professor at Cornell University, is his new book, Under the Influence.

Frank notes that standard economic theory says the spending decisions we make depend only on our incomes and relative prices. People’s assessments of their needs and wants are assumed to be completely independent of the spending decisions of others around them.

But this too is where the assumptions of standard theory are unrealistic. In real life, the things we buy and do are often heavily influenced by the “context” of what our friends are buying and doing.

We wear the clothes we think are fashionable, and we judge what’s fashionable by what our friends are wearing. The best way to predict whether a young person will take up smoking is whether their friends smoke.

We have an impulse to conform – which is stronger than we often realise. That’s why we can’t resist buying toilet paper when others are grabbing it, or selling our shares when others are quitting the market.

Psychologists call this phenomenon “behavioural contagion” – our tendency to mimic the behaviour of others. When some things start to become popular, they often become very popular. Same if they start becoming unpopular.

Frank notes that our tendency to copy what others are doing can have positive consequences (as when people exercise more because their friends are doing it) or negative consequences (as when we drink heavily because the people we live with are).

He argues that economists ought to be more conscious of behavioural contagion because of the opportunities they present for governments to use taxation to encourage us to make better choices.

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For this to work, we must really be 'all in this together'

There are two ways Scott Morrison can play this coronacession: he can spread the pain as fairly as possible, or he can yield to all his political instincts and play favourites. You know: lifters get looked after, leaners take their chances. Those my tribe judge to be not "having a go" won’t be given a go.

Fortunately, Sunday’s second, $66-billion assistance package suggests Morrison’s trying hard to overcome his instincts, be more statesman-like and not exclude unpopular groups from assistance. He’s got further to go, however.

The poor are the biggest losers in every recession and that will be just as true in the coronacession. Those who are able to keep working will be the least affected; those who lose their jobs will be the most affected.

The strongest reason for Morrison to take steps to spread the pain more fairly is that it’s the right – you could almost say the Christian – thing to do. But he has extra, more pragmatic reasons for doing so. One is that it's easier to get everyone to cop their share of the burden – and to pull their weight – if they believe the burden’s being shared fairly. If they know that "we’re all in this together" is more than an empty slogan.

A special reason in this virus-induced recession is that if you leave the poor – the unemployed, the casual workers, the sick and the homeless – feeling ignored and excluded, you rob them of both the motivation and the financial and physical ability to play their part in not spreading the virus to others. If you’re not caring, they become the weak link in your efforts to lower the infection rate.

One fairness principle Morrison adopted from the start is to avoid assisting big business (with the exception of the airlines), but rather ask them to do the right thing by their employees and customers.

Despite the cheap money the banks are getting from the Reserve Bank, it’s clear they’ve gone further with their concessions to small business borrowers, people with mortgages and even term-depositors.

Their profits and shareholders will take a big hit – the first big hit since the recession of the early 1990s - which raises a broader fairness question: if you can’t afford to keep paying your workers, how can you afford to keep paying dividends?

For big businesses, including banks and energy retailers, to move against customers who get behind on their payments in the normal way would make this recession even deeper, and help no one – as the government seems to be making clear to them in private.

The same principle holds for landlords, even though these are mainly what you’d class as small businesses. Evicting tenants at a time like this gets you nowhere. No one gave landlords a guarantee that negatively geared property was one-way bet.

The second package has used a temporary "coronavirus supplement" to effectively double the Newstart allowance for six months. Good move. It’s also a tacit acknowledgement of the truth of the almost universal criticism that the present dole is impossible to live on.

At first the government thought to pay the higher allowance to newly unemployed people but not the existing jobless, but fortunately has thought better of the idea. Now it needs to make sure the infamous Centrelink (since renamed Services Australia – irony, I presume) understands its political masters no long require it to hassle people more than help them.

It would also help to avoid saying that those newly on the dole were there "through no fault of their own", thus implying that those already on it were there through some fault of their own.

The new package’s doubled cash-flow support payments to small and medium businesses should help keep more employees in jobs, though the use of payments based on employers’ remittances of their employees’ pay-as-you-go tax instalments (intended to prevent firms from taking the payment but dismissing the staff) is biased in favour of firms with highly paid (and taxed) employees and against those with poorly paid employees, including casuals.

Many firms will fall back on the new $20,000-over-six-months minimum rebate, which is unlikely to stop many low-paid and casual workers being let go.

A quarter of all employees are casuals, and adding the pseudo self-employed (including those in the "gig economy") takes to 37 per cent the proportion of workers who have no paid sick leave. The second package’s failure to improve on the earlier arrangement for those people to be eligible to apply for the little-used "sickness allowance" will leave many still tempted to keep working when they should be at home in bed.

And the failure of either package to do anything to help the homeless leaves a gaping hole in our efforts to protect their lives from the virus, or to slow its spread.

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It's the coronacession: closing down on doctors' orders

It’s now clear that we – like most countries – are already in a recession that promises to be long and severe. It will be a recession unlike any we’ve previously experienced. Why? Because it’s happening under doctors’ orders. So it deserves a unique name: the coronacession.

It’s taken a few weeks for this to become obvious, mainly because economists don’t know much about epidemiology and it’s taken the nation’s medical experts until now to make clear that their preferred response to the virus will take months to work and involve closing down much of the economy.

We already know that real gross domestic product is likely to contract in the present March quarter and it’s now clear that last week’s $17.6 billion stimulus package is unlikely to fully counteract the fall in economic activity – production and consumption – during the imminent June quarter, brought about by the government’s measures to impose “social distancing” and encourage “self-isolation”.

Since the medical authorities are only now suggesting that these efforts to slow the spread of the virus may need to continue for six months – which, considering their bedside-manner efforts to break it to us gently, may well prove an underestimate – it won’t be surprising if the economy also contracts in September quarter.

Of course, Sunday’s further stimulus package has been designed to offset the loss of wages and profits that will arise from pretty much closing the economy down, but I’m sure the government and its econocrats realise we’re long past the stage of pretending that avoiding two successive quarters of “negative growth” means avoiding recession.

As Finance Minister Mathias Cormann now readily concedes, “businesses will close and Australians will lose their jobs”.

It’s the business closures, falling employment and rising unemployment and underemployment that characterise a recession – and are the reason why, in normal times, governments and central bankers try so hard to prevent them, not bring them about.

Once these developments fill the headlines, what happens to GDP each quarter will be of only academic interest.

To fill out Cormann’s cryptic description of what is coming, many businesses will close their doors – some temporarily, some for good - partly because the government has cut off their access to customers (the airlines, inbound tourism, sporting, arts and entertainment events) and also because it has encouraged people to stay at home, minimising travel, trips to supermarkets and shopping centres and visits to restaurants, pubs, cafes and coffee shops.

The many people working or studying from home can be expected to spend less than they normally would.

The nation’s income from exports will fall, particularly because of the government’s bans on the entry of foreign tourists and students. The recessions in other countries will reduce their demand for many of our other exports.

Of course, our recession will reduce our demand for imported goods and services (we won’t be taking overseas holidays for the foreseeable, for instance) and, in some cases, parts and goods we need to import won’t be available until Chinese factories are fully back to work and have caught up with their backlog.

As businesses find they have few or no customers, they will seek to wind back their activities, leading many to stand down staff or make them redundant. Casual workers will discover there are a lot fewer or no shifts for which their services are required.

So, fewer sales of goods and services lead to less production of goods and services, which leads to less work done, jobs lost and less income earned by workers, who then have less to spend, even on essentials such as rent and utility bills.

You see from all this that - although the virus came to us from overseas, and although so many other countries are in the same position as us that there’s a world recession - it’s not the rest of the world that’s dragging us down. No, it’s our decision to seek to minimise the number of deaths from the virus by slowing down its spread through the population, and doing so by closing down much of our economy for months on end.

As is their practice, our medicos have focused on saving lives and protecting our health, and haven’t worried too much about what their medicine would cost, or who’d be paying for it.

You and I will be paying the cost – with those who lose their jobs paying a mighty lot more than the rest of us – and it will be the responsibility of the government, advised by its econocrats, to do everything it can to minimise that cost and spread the burden fairly.

How? By spending big. How big? Not last week’s $17.6 billion, more like $176 billion. The second stimulus package we see on Sunday will be just another instalment.

This will blow the federal budget out of the water. It will be hit in two ways: not just by the extra spending and tax cuts the government chooses to make, but also by the simple fact that businesses and individuals who earn less income pay less income tax. Workers who lose their jobs not only cease paying any income tax, they have to be paid unemployment benefits.

But here’s the trick: the more the government skimps on the cost of cushioning the effects of its own decision to shut down much of the economy, the deeper and more protracted the recession will be and the longer it will take to get the economy back to running normally once the threat from the virus has passed.

Paradoxically, that means the more you skimp on the cost to the budget, the bigger the deficit you end up with, and the further off into the future the return to surplus becomes.

The measures announced on Thursday by the Reserve Bank, particularly the cheap funding to banks for loans to small businesses, will help a little, but the game is pretty much over for the Reserve and its “monetary policy”. From now on, everything turns on what Scott Morrison does with his budget.

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At last we’ve been shown the virus game plan. Boring

I grew up in the Great Depression. Well, not really, but there were times when it certainly felt like it. The Depression was my father’s favourite topic of breakfast conversation and I got to hear a lot about it, particularly the questionable behaviour of someone called Jack Lang.

It wasn’t until long after my father had been "promoted to Glory", as the Salvos say, I learnt from my sisters that the Depression had been his finest hour. In those terrible times, a generous government made thousands of unemployed men trudge from town to town to be eligible for "the susso" – a woefully inadequate sustenance allowance, often paid in kind.

Men moving around the backblocks of Queensland soon learnt to come to the back door of my father’s Salvation Army quarters, where the captain would go to quite extraordinary lengths to help them along their way.

Now, I’m not for a moment implying that what we’re about to go through as we cope with the coronavirus bears any comparison with the Depression, which lasted for most of the 1930s and drove the rate of unemployment to reach 20 or 30 per cent.

No, I’m just saying this crisis will turn our lives on their head for so much of this year that we’ll remember it for the rest of our lives and won’t fail to tell our kids about it in years to come.

It’s clear that, after a few weeks of unthinking panic and silliness, we’ve reached the business end of the epidemic as "community transmission" – spreading of the disease between people who had no known contact with a confirmed case or who had arrived from a badly affected country – begins in earnest and the authorities get progressively tougher in imposing "social distancing" – slowing the spread of the virus by keeping people apart.

This is a steep learning curve for everyone: politicians, medical experts and even all-knowing journalists. But the road map of where we’re headed, what it involves and roughly how long it will last – say, six months – is now apparent.

The authorities faced a choice between letting the contagion rip – getting it over quickly, but with an overwhelmed health system, serious cases going untreated and too many oldies and medically compromised people dying – or trying to slow the spread so the health system copes and deaths are minimised.

Unsurprisingly, they chose to "flatten the curve", using self-quarantine of people who may have the disease or do have a mild case, self-isolation (staying at home to avoid contact with others) and social distancing – banning large gatherings, restricting travel, maybe closing schools, encouraging people to work from home, and urging people to minimise their contact with others.

While slowing the spread reduces the number of deaths, it’s by no means certain it will reduce the number of people contracting the disease. The big price to be paid is prolonging the disruption to people’s daily lives and, hence, to the economy. Less paid work will be done, many will earn less income, less money will be spent, and unemployment and underemployment will rise.

A less obvious price is that the extraordinary lengths we will be going to to limit deaths will leave many people fearing the virus is a much greater risk to their health than it is. The great majority of people who get it will suffer no worse than a bout of flu. But the fear may be a good thing if it makes the hale and hearty more diligent in their hand-washing and avoidance of social contact.

Have you realised what this means for most of us? We’re about to go though a period of weeks or months of staying at home and rarely going out. This is obvious for the elderly and health-impaired, but will also apply to those who have to work from home, those casual workers whose shifts are cancelled, school and uni students attending classes online, and parents who can’t work because they have kids to mind (and shouldn’t be asking old grandparents to help out).

As I contemplate it for myself (I’ll soon be off on five weeks’ staycation), a word springs to mind, starting with b and ending in -ing. Social work academics are writing papers about "cabin fever" – fever in more ways than one.

It won’t be lost on a lot of people that the arrival of pandemics – this may be the worst, but it’s not the first and won’t be the last – is an unwelcome consequence of the globalisation of the world economy.

Against that, however, the digital revolution has made it easier for many screen-based workers to work from home and for students to view lectures. Teleconferencing is a reasonable substitute for face-to-face meetings and interstate business trips. The range of home entertainment is a lot wider and of better quality since the advent of such things as streaming video. You may not be able to attend football matches, but you can still watch them on telly.

Mobile phones make it much easier to co-ordinate with family members, and Facebook lets you keep up with friends. And not forgetting that e-commerce lets you keep spending. Which will be nice. But it doesn’t change the fact that "social distancing" is contrary to all our instincts as social animals.

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Avoiding the R-word won't be as easy as boosting June quarter

Sorry to be blunt, but anyone who thinks avoiding a second quarter of decline in real gross domestic product means avoiding recession needs a lesson in economics.

It’s clear that Scott Morrison’s $17.6 billion stimulus package – what you might call Kevin Rudd with Liberal characteristics – was aimed primarily at boosting economic activity in the June quarter. Fully $11 billion of the $17.6 billion will be spent or rebated from the budget during the quarter.

Half of that will come from the cash-flow rebates to employers, and most of the rest from the $750-a-throw cash splash to social welfare recipients (including parents receiving family payments).

Not all the cash will have been spent, of course, but our and other countries’ experience suggests a lot more will be than you may expect. Former prime minister Rudd’s two cash splashes in 2008 and 2009 are immediately apparent in the retail sales figures of the time.

In any case, to the possible $11 billion you have to add well over $4 billion worth of spending on cars, vans and equipment by small and medium-size businesses, induced by the temporary investment incentive, which will be spent before June 30 but won’t hit the budget until next financial year.

This helps explain why Treasury estimates that the stimulus package will add 1.5 percentage points to whatever other growth or contraction in real GDP we get in the June quarter. Since growth in a normal quarter would be about 0.5 per cent – and, for comparison, Treasury and the Reserve Bank have estimated that the coronavirus will subtract 0.5 percentage points from growth in the present March quarter – this suggests the package stands a good chance of stopping next quarter being a second successive quarter of "negative growth" – contraction.

So, recession avoided? No, all that would have been avoided is having the financial markets and the media running around like headless chooks, shouting the R-word – and so frightening the pants off the rest of the populace – just as it was avoided in the March quarter of 2009, after Rudd’s carefully timed second cash splash.

Let’s be clear. Just as it was exactly right for Rudd and his advisers to do everything they could to avoid a second successive quarter of contraction, so it’s exactly right for Morrison and his advisers to do the same. That’s not because the two-quarters rule makes any sense, it’s because so many silly people think it makes sense.

When you’re trying to head off – or at least minimise – a recession, what people think and feel (their animal spirits) matter as much as what they actually do, for the simple reason that what people think and feel – their "confidence" – ends up having so much influence over what they do.

(What a pity the epidemiologists don’t have the same tried-and-true template for responding to a virus outbreak that economists have for responding to the risk of recession.)

But what anyone who wants to be smarter than the average bear needs to know is that the two-quarters rule makes little sense. It’s no more than an arbitrary rule of thumb with no science behind it. It appeals to the simple souls in the financial markets and the media because it’s simple, objective and (the killer argument) involves minimum waiting.

Only trouble is, for a rule of thumb it doesn’t work well. As the independent economist Saul Eslake demonstrated some years ago, it throws out too many false negatives. That is, it can tell you we don’t have a recession when we do. For instance, two negative quarters separated by even a zero quarter tells you we’re home free. Really? How long will the punters swallow that?

But another problem is that it focuses on the wrong variable – production – when what we really care about is employment and unemployment. Dr David Gruen, now boss of the Australian Bureau of Statistics, once proposed the most watertight definition of recession: "A sustained period of either weak growth or falling real GDP, accompanied by a significant rise in the unemployment rate."

And Eslake has road-tested a different rule, showing it has produced no false signals. It defines recession as "any period during which the rate of unemployment rises by more than 1.5 percentage points in 12 months or less".

Guess what? In the nine months between September 2008 and June 2009, the rate of unemployment rose by 1.6 percentage points to a peak of 5.9 per cent, but then fell back to 5.1 per cent over the following year. So we did have a recession, but it was so short and mild the punters didn’t notice it.

And taming recession so successfully brought Labor no thanks at the ballot box.

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Too soon to say how hard virus will hit economy

To judge by the gyrations of the world’s sharemarkets, the coronavirus has us either off to hell in a handcart or the markets are panicking about something bad that’s happening, but they’re not sure what’s happening, how long it will last or how bad it will end up being. I’d go with the latter.

So would Reserve Bank deputy governor Dr Guy Debelle. He said in a speech this week that there’s been a large increase in the financial markets’ "risk aversion and uncertainty".

"The virus is going to have a material economic impact but it is not clear how large that will be. That makes it difficult for the market to reprice financial assets," he said.

That’s central-bankerspeak for "they’ve got no idea what will happen". Which is hardly surprising, since no one else has, either. More from Debelle’s speech as we go.

But understand this. Farr’s law of epidemics, developed in the mid-19th century, says that the number of cases of a new disease rises and then falls in a roughly symmetrical pattern, approximating a bell-shaped curve.

Depending on how quickly the disease spreads, the bell can have a steep rise and fall or a shallow one. Epidemiologists seek to make the bell as shallow as possible by slowing the disease’s spread. This allows the health system to avoid being overwhelmed – reducing the likelihood of panic and chaos, and making it more likely those who most need medical attention get it.

In theory, it allows more time for the development of a vaccine or useful drugs, but the World Health Organisation has said it will take about 18 months for a coronavirus vaccine to be widely available.

At this stage, the main way of slowing the spread is "social distancing" – reducing the contact between people by cancelling sporting events, closing schools or workplaces or ordering people to work at home. Of course, many people are doing their own social distancing by staying away from restaurants and bars.

The virus has now arrived in most countries. Its spread is well advanced in China, Iran, Italy and South Korea, but much less so in Singapore and Hong Kong, where the authorities got in earlier with their social distancing measures.

Such measures, however, cause considerable inconvenience, especially to parents, and disruption to the economy – both to the production of goods and, more particularly, services, and to their purchase and consumption. Not to mention the associated loss of income.

Some of this economic activity may merely be postponed – so that there’s a big catch-up once the epidemic subsides. But much of it – particularly the performance of services (if you miss a restaurant meal or a haircut you don’t catch up by having two) – will be lost forever.

Obviously, China is central to the story for both the world economy and ours. China’s economy was hit hard by the virus and the drastic but belated measures to slow its spread, though the number of cases does seem to have passed its peak and rapidly declined. Debelle said "the Chinese economy is now only gradually returning to normal. Even as this occurs, it is very uncertain how long it will take to repair the severe disruption to supply chains."

The globalisation of the world economy in recent decades is a major part of the story of this virus. It means people in any part of the world are almost instantly informed about unusual things happening anywhere else in the world. It’s good to be better informed, but sometimes it can be frightening.

For another thing, globalisation has greatly increased the trade between countries, particularly trade in services, such as tourism and education. Trade in services has been greatly facilitated by the emergence of cheap air travel.

It’s all the overseas air travel everyone does these days that has caused epidemics that break out in one part of the world to spread around the world within a few weeks. More pandemics has become one of the big downsides of globalisation.

And when governments try to limit the spread of a virus by banning the entry of people from countries where the virus is known to have spread widely, this disrupts and damages those of that country’s industries who sell their services to foreign visitors.

(When the government stops you supplying a service to willing buyers, economists classify this as a shock to the "supply side" of the economy. When your sales fall because customers become more reluctant to buy whatever you’re selling, that’s a "demand-side shock" to the economy.)

Our imposition of a ban on non-residents entering Australia from China has hit our tourism industry and our universities. Debelle said that, since January, inbound airline capacity from China has fallen by 90 per cent. Until recently, he said, tourist arrivals from other countries had held up reasonably well, "but that may no longer be true".

The Reserve estimates that Australia’s services exports will decline by at least 10 per cent in the March quarter, roughly evenly split between tourism and education. Since services exports account for 5 per cent of gross domestic product, this suggests the travel ban will subtract 0.5 percentage points from whatever growth comes from other parts of the economy during the quarter.

Another consequence of growing globalisation is the emergence of "global supply chains" – the practice of multinational companies manufacturing the components of their products in different countries, before assembling them in one developing country and exporting them around the world.

China is at the heart of the supply chains for many products. So Debelle’s remark about the delay in repairing "the severe disruption to supply chains" is ominous. The Reserve’s business contacts tell it supply chain disruptions are already affecting the construction and retail industries – but there’s sure to be more of this "supply-side shock" to come.

And the shock to demand as - whether through virus-avoidance, necessity or uncertainty - consumers avoid spending money, has a long way to run. But, Debelle said, it’s "just too uncertain to assess the impact of the virus beyond the March quarter".

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Morrison's trickle-down stimulus may not be enough

I hope I’m wrong, but I doubt if Scott Morrison’s $17.6 billion stimulus package is big enough to stop the temporary shock of the coronavirus outbreak becoming a longer-lasting blow to the economy.

We live in an economy that produces goods and services worth $2 trillion a year. To have a significant impact on the economy we needed measures worth at least 1 per cent of that – about $20 billion in their first year.

To be fair, the package is much bigger than earlier envisaged, but “a touch less than 1 per cent” isn’t as comforting as well over 1 per cent. It’s clear the measures in the package have been carefully designed – Treasury’s fingerprints are everywhere – and Morrison keeps saying it’s “scalable”: it can be added to. Maybe he’s already intending to top it up.

Treasury’s famous advice to former prime minister Kevin Rudd during the global financial crisis in 2008 was “go hard, go early, go households”. That advice is as good today as it was then. Morrison and his Coalition colleagues have spent the past decade finding fault with Rudd’s stimulus but, as the prominent economist Chris Richardson has said, “it worked”.

Apart from not going hard enough, Morrison’s package is – for reasons easy to guess at - half-hearted about “going households” – that is, sending cash direct to households in the hope of making them less worried about their debts and getting them to spend in the shops.

Morrison’s allegedly nothing-like-Labor’s cash splash is $750 a throw, but limited to welfare recipients. Since retailers were doing it tough even before the virus, it should have gone to all low and middle income-earners.

A special feature of the virus “challenge” (as the spin-doctors prefer to put it) will be the need for workers to stay home – and the temptation for the quarter of them not covered by sick leave to keep working and earning when they shouldn’t.

Morrison’s solution is to waive the delay period once casual workers have jumped through all Centrelink’s hoops and applied for the little-used “sickness allowance”. Much easier and more effective to have included them in the cash splash.

Rather than the direct approach of a bigger cash splash, Morrison has favoured the trickle-down approach: he gives cash rebates to small and medium businesses, intended to discourage them from laying off workers if the virus disruption means they don’t have much work to do.

(Big businesses have been incentivised with an appeal to their patriotism. How this works if they are foreign-owned – like the Big Singaporean, BHP - I’m not sure.)

A praise-worthy effort to protect the jobs of the nation’s 120,000 apprentices and services-sector trainees has been included.

The temporary expansion of the instant asset write-off for smaller businesses should have some success in encouraging them to spend on new cars, trucks and equipment before June 30, despite the less-than-booming demand for their products. Of course, this will mainly draw forward spending that now won’t occur over the next year or two.

But the real money - $6.7 billion - will be spent on a temporary scheme to improve the cash flow by between $2000 and $25,000 of small to medium businesses that keep their staff on this year.

Trouble is, much of that money will go to businesses that had no intention of letting their skilled (and thus well-paid) workers go, whereas many small businesses whose workers are unskilled and badly paid (and thus more likely to be let go) won’t be entitled to anything more than the minimum $2000 rebate.

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It will take time to get used to living with the new virus

The coronavirus is deadly – it will end up killing quite a few oldies – but we (and the rest of the world) are making so much fuss about it mainly because it’s new. Thanks to that fuss, it’s likely to do more damage to the economy than it does to life and limb.

How much damage we do to the economy – and whether it lasts a few months or a few years – will be determined largely by the way Scott Morrison and his ministers manage all the fuss: on the medical side and the economic side.

There’s one sound medical reason for being concerned about the newness of this particular virus: as yet, we have no natural immunity to it. But don’t worry, we’ll get it in due course – although we’ll have calmed down long before that. The “novel coronavirus”, as the medicos call it, will have lost its novelty in a different sense.

The news media are making a great fuss for no reason other than the virus’ newness. New is what news is about. What’s new is unknown and what’s unknown is frightening.

You may think we’re making all this fuss not because the virus is new, but because it’s deadly. But we have daily contact with a lot of deadly things we don’t make a fuss about because we’re used to them.

It could be that road accidents cause more deaths – and certainly more injury – than the virus does this year. And seasonal flu carries off a lot of oldies every year without much fuss. In the end, Sydneysiders decided that the death and injury caused by late-night drinking wasn’t a good enough reason to limit the fun.

One key group who are understandably worried about the virus because of its newness are doctors and other health and aged-care workers. It does matter more if someone in such intense contact with the elderly and the ill gets the virus than if I get it.

But what’s worrying the doctors is how little we yet know about the characteristics of the virus and, more particularly, how little they’ve been told about what to do. Where are the protocols on how to handle patients who present with symptoms? What about face masks and testing kits?

Our surgery or hospital or old people’s home is already stretched, how will we cope with the influx? What will we do if we have to send key workers home for a fortnight because they’ve caught it or may have caught it?

I’m sorry to disillusion you if you haven’t worked it out yet, but the health authorities aren’t trying to stop the spread of the virus. They’re not trying to nip it in bud or stop it in its tracks. The cat’s out of the bag and it’s too late for that.

So what are they trying to do? Just slow down its spread. Why? To give the medical and aged care system time to prepare for the onslaught – including the time to set up separate “fever assessment clinics” where the “worried well” are kept away from those likely to have caught the virus, and away from those known to have.

As the disease spreads to many more people, it won’t be possible to put lots of medical time into tracing the contacts of every particular carrier – nor close a school for a few days while you do it. That is, in the best sense, a delaying tactic.

As Dr Katherine Gibney, of Melbourne’s Peter Doherty Institute for Infection and Immunity, and others, explain on the universities’ The Conversation website, as case numbers rise, case management will need to be streamlined. “While many mild cases have been admitted to hospital during the containment phase, community-based care [that is, staying at home] will be the reality for most people,” they say.

Australia’s Chief Medical Officer, Professor Brendan Murphy, says travel bans are only a way to slow down the spread of the virus. “It is no longer possible” to prevent new cases entering Australia, he says. This suggests that, before long, the border measures will be relaxed.

Last week the NSW Chief Health Officer, Dr Kerry Chant, was blunt: “We are not going to be able to contain this virus.”

Gibney and colleagues say “it’s likely, but not certain, that COVID-19 will remain in circulation beyond 2020 and become ‘endemic’ in Australia – that is, here for good” – like many viruses before it, including seasonal flu. Last season almost 300,000 cases of flu were reported, with 810 deaths – a fatality rate of about 0.27 per cent.

As yet, figures for the coronavirus are preliminary but it’s thought to be much more deadly than the flu, with a fatality rate of 1 or 2 per cent. It’s also more contagious than the flu, though much less so than measles. Its incubation period of two to 14 days is three times longer.

Even so, about 80 per cent of those who get it have a mild to moderate illness and only 20 per cent have a severe to critical illness. Most people who aren’t elderly and don’t have underlying health conditions won’t become critically ill.

Disruption to the economy is unavoidable, but the danger is that hour-by-hour reporting of efforts to slow the spread is frightening a lot of people and will lead them to overreact to the risk of infection, closing businesses and purses and making everything worse than it needs to be.

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