The government can call on the central bank to provide money but is not trusted to do the right thing
When or rather if economies return to their pre-shock growth paths, the cost-benefit analysis of the lockdowns is unlikely to bear favourable witness to the responses made to the Covid crisis by SA.
The cost is the difference between GDP on its pre-Covid path (which was on a regrettably moderate incline) and what is likely to be produced and earned before we get back on that path. My own back-of-envelope calculations came to a very large number, equivalent to possibly R1-trillion in money of the day, or equivalent to a quarter of pre-Covid GDP. Certainly, a very large amount of potential income will have been sacrificed. The benefits in the estimate of the value of years of life saved by the lockdowns will be much harder to calculate.
The more precise calculations of costs and benefits dealing with any future pandemic could go as follows. First, estimate the losses of income and output caused by any potential lockdown. These costs in the form of income and output foregone should then be compared with the cost of providing a reserve of medical capacity sufficient to prevent the medical system from being overwhelmed by pandemic demands — which is the case for imposing a lockdown, as we have been reminded.
Hoping to eliminate death is not a realistic option for medical and economic reasons. Minimising the difference between the costs and benefits of any policy should be the objective and is a judgment call. Yet the cost of building and maintaining an adequate medical reserve will be much lower than the sacrifice of income caused by any compulsory lockdown. But this cost will be explicit on any budget that current taxpayers would be liable for. And they and the immediate beneficiaries of alternative government spending clearly attach much present value to lower taxes and other welfare benefits. Future benefits that are uncertain in time and scale are always heavily discounted. But it is a trade-off that is resolved whenever a forward-looking society invests in a reserve to defend itself against any potential invader.
But what happens when war or a pandemic breaks out? The future, after the war, then becomes largely irrelevant compared with the immediate task of winning the war. The task is to spend enough and well enough to immediately increase resistance or medical capacity. Any failure to have built a medical reserve will make it practically difficult to do enough, quickly enough. The crisis, however, becomes too important for money to stand in the way. And where will or can the extra spending money come from?
Raising tax rates will be self-defeating. Less not more tax will be collected. Raising additional government debts may prove very expensive for taxpayers to pay for and repay in the future.
There is another way. A government under great pressure to spend more can call on its own central bank to immediately provide the money to spend. The central bank can create as much money for its government as it chooses to do. It provides extra cash for the government by buying government debt in the market or providing the government with an overdraft to spend on a large enough scale. This is what the developed world is doing on a very large scale: creating much more money to fund extraordinary increases in spending to fight the crisis. The policies are expected to be reversed when or should inflation rear its ugly head.
They have done what SA has been unwilling, not unable, to do. For want perhaps of a full understanding of opportunity costs, we have not spent enough. But more so because our government is not trusted to do right for our society and economy: in the short run spend more and in the long run spend less. Tragically so.