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Targetting and the stimulus: who should pay the rent?

March 22, 2020 - 18:30 -- Admin

I ran into Ken Henry at a function – I think it was the terrific PM’s Science Prizes in late 2008 but someone may be able to look things up and falsify this claim. In any event, I squatted at his table and had a quick chat to him about the recently announced or soon to be announced stimulus. He said that, he’d been saying to his colleagues and to cabinet, his plan was to “go early, go hard, go households”. I said “can I quote you on that” and he had a think and said something like “Yes, why not?” So I did and it caught on.

Economics is a simple discipline with just a few basic ideas in it. One is targeting.

Here the idea was to get action as quickly and efficiently as possible over as broad a base as possible. It was very successful, particularly when you consider that you’re always compromising – you have to operate through instruments like taxes, subsidies, rates of payments and so on which set off various incentive incompatibilities which then create loopholes through which people will enrich themselves without contributing to the aims of the program. You might give money to some party and they just stick it in the bank – so you’re trying to take all that into account. Then there are the political constraints.

When I saw the Victorian Government’s cutting of payroll tax yesterday I tentatively tweeted that it was poorly targeted. I’m now less tentative. It’s lazy, if very typical, policy. It’s mostly token policy so the government can be seen to be doing something. You’d think at a time like this we could use the crisis to do a little better. The problem with the measure is that it’s so badly targeted. Where the point of the first 2008 stimulus was to get money out to households in a broad-based way, it was still targetted in that most of the payments were to people with high propensities to spend.

I tweeted yesterday that I’d have used the money to pay much more – a multiple of the payroll tax relief targeted to businesses in distressed sectors that employed a lot of people. One might have announced emergency measures and a review to be done in a few weeks so that this time next month the assistance might come with some behavioural qualifications as well – so that, for instance, it was only available on performance of some preconditions associated with continuing to pay employees.

And there are other sectors to think of to spread the risk around. And this is likely to draw in more resources than state governments can do using their taxing and spending powers given how narrow their taxing base is. For businesses in distressed sectors, there should be a short term entitlement for businesses to capitalise interest, and some attention paid to interest rate relief more generally, but I’d announce some short term inquiries into this to work out what’s the best we can do and still not imperil the stability of the banking system as a whole.

Rent is different. The ownership of property is an equity-like investment, and so I’d announce that in distressed sectors there would be rent holidays (I’m not sure whether they should be 100% or less than that) for some months to be determined on a monthly basis. Am I really suggesting that we should, in effect confiscate rental payments for SMEs in distressed sectors? Yes I am. Someone has to wear the risk of this emergency and so this should be prosecuted, as the clichémeisers are insisting, as we would a war.

We should have a government fund to assist anyone whose relying on rental payments to meet their basic living expenses to get relief as will be the case with some self-funded retirees. But the bulk of landlords are in a better position to wear these extraordinary developments than their tenants. In normal times risk should be allocated according to the contractual terms to which people have agreed.[. In the light of my comments about rentiers being in a better position to bear the risk than rent payers, allowing markets and contracts to allocate risk in normal times will rarely be optimal in some absolute sense. But that’s just theoretical in normal times. Because there’s no incentive-compatible way to regulate this inefficiency away. If rentiers are required to bear risks they don’t want to, they’ll take their money elsewhere.] But these are not normal times. Indeed, it is precisely by forcing risk to be borne more widely that we can maximise our economy’s flexibility to this crisis and see it bounce back from what looks like a savage downturn. Had the countries at the epicentre of the GFC adopted a similar course then, they’d have recovered much more strongly from the GFC.