Crisis leadership: The high costs of inaction

Out of the ashes of the bushfire crisis to the Covid-19 pandemic, a new style of crisis leadership has emerged.

Penned by independent economist Stephen Koukoulas and ASX-listed AI company Flamingo Ai founder Dr Catriona Wallace, this is the second of a two part article analysing Australia’s crisis leadership during two of the worst natural disasters in history. Read part one here.

Catriona’s experiences are moving. Heartbreaking. Traumatic.

An economist looking at those experiences will understand how these events impact the so-called animal spirits in the economy. This is the mood of consumers and businesses that cannot be swayed with a change in interest rates or a tweak of the tax system.

The personal losses from the bushfires, the resulting heightened stress and anxiety, the destruction of property and businesses are significant shocks to the economy. The evolving coronavirus crisis is another.

Talk of recession has reached a crescendo.

Recessions are rare. Australia has had only one recession in the last 37 years.

It is critical to realise that random shocks, such as fires, floods, wars or disease, hit the Australian economy from time to time. While the origin of each shock is almost always different, the impact is similar.

They mean weakness for business, fear for consumers, rising unemployment. Human suffering.

The test of economic leadership is how to respond to each of these events, by setting policies that limit the downside and reframe conditions so that the economy can grow, lifting people along the way.

A fragile beast

These shock events, like the bushfires and the coronavirus, show that the economy is a fragile beast.

Unexpected events can undermine even the best-set policies.

Leadership in economics is multifaceted. It is about reacting to circumstances with decisiveness and effectiveness, without ideology and misplaced views about “what the other side of politics does”. It is anticipating change with a necessary policy suite that limits any downside while it maximises the benefits of that change.

It is also true that we consumers are a fickle bunch.

Even small events can change sentiment and spending – unusually hot, cold or wet weather, for example, can have a huge effect on consumer spending on clothes.

It can be that simple.

Businesses plans are usually medium to long term. Investing in new buildings or new machines and equipment to boost capacity is expensive, with the returns spread out over many years.

If things ‘go wrong’, businesses can be left with debt and obsolete infrastructure and equipment and many will go bust. Fortunes lost, jobs destroyed.

The bushfires

The recent smoke and bushfires crushed tourism in the affected areas. It slowed to almost nothing. Key infrastructure was burnt – these losses are just part of the economic cost of the fires.

While there will be a positive statistical effect on measured GDP as the reconstruction effort unfolds, the fires were a disaster for many businesses. The government response was to allocate payments to impacted people. This is good in theory but alas, the amounts of money are small, being just $2 billion in total over 3 years and for most recipients of the funds, the payment is a mere fraction of the cost of the disaster. Just as bad, the flow of money is slow to hit their accounts.

This poor implementation of the response compounded the losses and pain for those already under severe stress from the fires.

The coronavirus

The tardy economic policy response to the coronavirus sees Australia on the cusp of a recession.

This will be the first recession in almost 30 years if it is allowed to fester.

While the government clearly cannot be held responsible for this health disaster, what it does in response is of its own making.

The government has chosen to pump money – some $85 billion - into the economy which has the express aim of supporting the economy as businesses shut and the dole queues wind around the city streets.

This is a good start, but unfolding events mean that more action will be needed.

Unfortunately, many of the measures will be slow to reach the pockets of households and small business. This is a problem. The money needs to be fast tracked to get into the economy, to minimise the downside from what will be a deep recession.

With the government receiving forecasts of GDP dropping 10 per cent as a result of this crisis, the stimulus measures to date are not enough. With the economy on the cusp of the deepest cycle since the 1930s Great Depression, it is clear several hundred dollars of extra stimulus will be needed.

The maths of economic policy is that simple.

Gin and tonic?

Supply chains have been also disrupted with the coronavirus, hurting business.

A highly successful boutique gin distillery in Sydney is confronting a problem because it imports its bottles from China. The bottle supplier has stopped production due to the lockdown of people in the part of China near the manufacturing plant.

Without the bottles, which are moulded to a special shape, the local gin distillery cannot bottle and distribute its gin.

Part of the fall out through the economy can be as obscure as this.

Toilet paper and stock market panic

People from all walks of life are nervous and unsure about what the virus will mean for them. We have seen panic buying of toilet paper. Panic selling of shares.

People are investing in government bonds where yields are 0.5 per cent. In some countries, the yields are negative.

The reactions are understandable, even if they appear irrational.

The real world

There are other economic problems, unfolding before our eyes.

Airlines have cut flights. In simple graph terms, look at the extraordinary impact the coronavirus has had on passenger numbers in and out of Sydney airport. It speaks for itself.

Casual workers are working less. Cafes and restaurants are closing.

Lobster farmers are not selling their produce as restaurants close.

Wine makers are similarly suffering.

The changing way we work and the surge in gig employment means more people are hurting, with fewer hours worked – fewer gigs – less take home pay.

The financial pressures are severe and real.

Credit analysts are warning businesses that the late payment of bills will double, defaults of bills will rise.

Those living off their superannuation have had their savings slashed as the stock market volatility has wiped off billions of dollars from share markets.

They will cut their spending. Alternative investments, such as terms deposits are lucky to be yielding 1 per cent.

There will be pain in all parts of the community because of the fires, because of the coronavirus.

The other economic issues

With the bushfires there will be – somewhat perversely – a boost to the economy from the middle of 2020 as houses and commercial properties are rebuilt, filled with furniture and equipment, new cars purchased and repairs to infrastructure carried out, there will be lingering doubts about the viability of many towns, villages and farms impacted by the fires or indeed, at risk from future fires.

This is all fine and well, but there are other questions.

Will houses in the bush be vulnerable next summer? Or the summer after that?

Does this mean that insurance premiums in fire-vulnerable regions are about to skyrocket? It might simply be too expensive to live in these areas.

The government has a role to play in disaster mitigation – which is building the infrastructure to reduce the risk of fires, floods and other natural disaster. Are governments doing enough?

Will holiday makers be less inclined to holiday amid the trees, forests and bushland next summer, especially when there are the inevitable forecasts for weeks of hot, dry weather? It was a horrible experience for so many this summer, no one could be blamed for being cautious.

Who would want to have their business in an area reliant on that sort of tourist trade?

This could further test the financial viability of many businesses who rely on tourism.

Jobs will be lost, businesses will close.

Then there are likely changes to the cost of new building – will local government demand a more fire-proof form of construction? Can people afford to rebuild?

Effective crisis management is good for the economy

As Catriona outlined, the good news is that with good leadership, vision and specific planning, reaction to disasters can be improved.

This has the added benefit of being good for the economy.

Anticipating the impact of a disaster reduces the severity of the event and reduces the damage and losses. It also helps as the response to events ‘fix’ the problems speedily, usually with fresh economic activity – buying emergency vehicles, equipment, the clean up, the rebuild are all economic pluses.

In the case of the bushfires, it means having fire fighting equipment at the ready – planes, trucks, pumps, hoses - with skilled fire fighters at the ready and perhaps most importantly, water available to contain and extinguish the fires.

One critical problem with droughts and fires is that dams are often low or bone dry when water is needed for fighting fires.

Waterproof Australia with desalination

Not that governments can fire proof all of Australia but a strategy that has desalination plants around the coast, pumping water to the cities, the towns and even regional areas can be done.

Pump the water non-stop into these communities and dams and if there is too much water, or when it rains, redirect the water to other dams, and down the rivers to assist farmers and the environment.

Think of the billions of dollars that need to be invested? It would be a jobs and investment bonanza. It is economic growth that can be spurred by government policy and wonderfully can leave an infrastructure asset that improves the lives of all Australians with life enhancing access to water.

In the end

In the field of managing the economy, leadership is about doing whatever it takes to keep the economy growing, to ensure everyone who wants a job has a job and it means setting fair policies on tax and spending.

A growing economy delivers much to society. Australia’s economic history is filled with examples of great leadership and we are better for it.

Australia remains one of the richest countries in the world, even with the unfortunate tendency to poor leadership in recent times, a problem which has cost society so much.

Ignoring expert advice, being slow to act to problems, not anticipating inevitable changes in society, business and demographics is costly.

For governments, leadership means having contingency plans for when things go wrong. It means writing the plans and having them in the top drawer when a crisis inevitably strikes. Making sure those plans are fit for purpose and that they can adapt as circumstances change.

Every year or two, there will be a global economic shock, geopolitical ructions will escalate or there will be a natural disaster or a health event which hits society, people and the economy.

These can hurt the economy and that hurt shows up for consumers - you and me – and businesses.

Like most things in economics, there are solutions to problems.

Implementing them takes a leader with vision, courage and money.

People recall great leaders in war. The stakes were high. When democracy and standards of decency are under severe threat, great leaders didn’t worry about the budget surplus nor were they concerned about public opinion polls and focus groups.

They did the right thing.

Not every decision was perfect and there were costs associated with the response.

But thankfully, the good leaders did whatever it took to fix things.

Australia needs that spirit in dealing with and preparing for the next natural disaster or unforeseen crisis for the sake of its people and the economy.

Stephen Koukoulas is no nonsense economist who calls it without fear or favour. He is currently Managing Director of Market Economics as well as being a Research Fellow, Per Capita. Stephen is also a keynote speaker at Ode Management.

Dr Catriona Wallace is the Founder of Artificial Intelligence and ASX Listed company Flamingo Ai and has a PhD in Leadership. Flamingo Ai is the second only woman led (CEO & Chair) business to list on the Australian Stock Exchange. Dr Wallace is Adjunct Professor at the AGSM, UNSW and sits on the Board of Responsible Technology Australia.

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