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Pandemic Economics in the Kiwi Context

Here's my NBR article today, At present it is their number one most popular read!

Whilst many of the headlines in our mainstream media still heavily feature medical experts, much attention overseas is being paid to the future economic impact of the pandemic. How the virus is affecting the prosperity of different nations and, in particular, their leading cities, has become a topic of intense interest. The implications for NZ are stark. Where to start?

The Spanish flu in 1918-19 had a quite small economic effect on the US, despite killing hundreds of thousands, primarily since America was heavily dependent on demand for industrial production, which largely continued throughout that period.

By contrast, many countries are now far more reliant on service industries, such as hospitality. Of Auckland’s output, Infometrics reports that 69% comes from services. Since these mostly depend on face-to-face interactions, they have been especially affected by virus restrictions. By contrast, and somewhat reflecting the events of 1918, this past 2021 year was a record one for NZ’s dairy production.

Another focus of pandemic economics has been the outsize role that cities play in prosperity. The story of innovation from ancient times is closely inter-twined with the rise of the city. They’ve become hubs where people come together to share new ideas and start ventures. Ancient Athens, where Plato taught Aristotle amidst its dense urban streets, is the classic case.

Much of NZ’s future success, or failure, will hinge on Auckland’s status, or lack there-of, as a magnet for attracting edgy, cool, young, movers and shakers, providing them with a stimulating environment in which they can hang out, unencumbered, and “make it happen”.

Yet the population density of cities has also long aided the spread of disease, such as cholera, prompting the rise of public health measures, like bringing in fresh water and taking out sewerage. It was, after all, Auckland that ended NZ’s “elimination policy”, which proved impossible to sustain in our urban environment.

Back in 431 BC, Athens successfully hid behind its city walls to keep out the Spartans, but unsuccessfully fell victim to disease which crept in through its port of Piraeus, wiping out up to one quarter of its population. Millennia later, Covid’s entry appears to have been through Auckland’s airport. Trading nations’ ports have long been a liability when it comes to bugs.

Pandemic economists are predicting that, to the extent the virus persists, cities may become less attractive for older folks. On the other hand, the desire of the young to socialize, forge careers, take risks, live in a gritty place, together with their more robust immunity, will probably see them still drawn to city life.

Affordability of housing, good schools, quality health-care and policing are vital for cities to be attractive. Should Auckland lose its ideal of being a “super-city” for all, and instead morph into a super-expensive, semi-locked-down enclave, then our country’s primary engine of future economic prosperity will be jeopardized.

Already, across many of our University courses, students are not attending classes as they get put online. Pass rates will be little affected. The chances of making a friend out of a fellow student who may have become a future business partner in an Auckland-based start-up will undoubtedly suffer.

Bigger countries than ours have many large cities, some of which gradually die whilst others boom. Detroit in the US lost its auto-manufacturing base in the 1970s, crime soared and decay set in. By contrast Seattle, where Microsoft opened its headquarters in 1979, has boomed. NZ is different. It is dominated by one large city which dwarfs the others. If Auckland fails, there’s not much else.

As to whether the demand for commercial office space will decline in favour of Zoom meetings as a result of the pandemic, that question is subject to ongoing debate. Back in 1980, “futurists” like Alvin Toffler predicted that computers would create a world in which we left our offices and returned to “the home” which would become an "electronic cottage." Skyscrapers would become "ghostly warehouses or converted into living space" as “de-urbanization” took place.

Over the past forty years, at least up until 2020, Toffler could not have got it more wrong. Big cities with large populations of highly educated residents like New York, London and San Francisco boomed. Urban economists mostly take the view that “face-to-face” interactions are still greatly needed to facilitate innovation and will return to previous levels, unless the pandemic persists, in which case alternative long-term arrangements maybe forced upon us. After all, we are a social species.

Ironically, although many Web companies are touting the benefits of virtual meetings, Google recently announced a plan to spend $US 2.1 billion on a New York office to bring their programmers physically together to collaborate.

Some overseas economists writing on the pandemic note that the proliferation of strong government health interventions, most of which have been a good thing, are giving way to calls for unrelated redistributive economic interventions. In the Kiwi case, our media often throw a spotlight on the inequality issue.

Due to such concerns, Revenue Minister David Parker launched a high-profile “information gathering” exercise into the personal finances of “the richest” Kiwis. He has long extolled the virtues of Thomas Picketty’s book, “Capital in the 21st Century”. That book is the bible of supporters of tax-the-rich confiscatory wealth redistributions.

The timing of Parker’s probe could not have come at a worse time. Why frighten ultra-successful passport-holding Kiwi ex-pats away from coming back? Not only has their access to NZ been heavily restricted by the quarantine system, they now also perceive a risk of being subjected to an Inland Revenue spy mission and Robin Hood-style policies should they return.

At a more aggregate level, our authorities, particularly the Reserve Bank, seem to have got confused about the nature of the economic shock caused by the pandemic. It did greatly lower demand, mainly for services, during the lockdowns, which was deflationary, although that demand quickly bounced back.

However, the shock also has had a heavy supply-side component, which was inflationary. Border controls have choked off NZ’s ability to hire from abroad, even from its pool of ex-pats. Supply chain problems and delays are widespread. By overestimating the deflationary demand-side effects and under-estimating the inflationary supply side effects, monetary policy ended up wildly out of kilter.

The primary challenge now has become not only to ensure public health but at the same time safeguard the future vibrancy of our economy, with Auckland as a hub of abundant opportunity and mobility, attracting stars from around the world whilst retaining its own. That balance is presently far from being achieved.


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