Our economy is in the COVID valley of death. What will be on the other side, and when?
As America's second quarter GDP takes a record plunge, here are clues to the economy that awaits us on the other side of this COVID-19 nightmare.
More Americans have been killed by the COVID-19 pandemic than in the Korean, Vietnam, Iraq and Afghanistan wars combined, and the carnage hasn’t ended. Corporate bankruptcies are increasing, the second quarter Gross Domestic Product just plunged a record 32.9% from the previous quarter, and resumption of normal activities is not on the immediate horizon for most people. So the recession will be with us until we have a vaccine and the pandemic ends — likely another year. What will the economy look like on the other side of this veritable valley of death?
More industry concentration. Financially strong and well-positioned companies like , Google, Apple and Amazon will benefit during this crisis from organic growth, investment in research, and/or mergers and acquisitions. At the other end of the spectrum, companies with weak balance sheets and/or mediocre business models will fail (J. Crew, Neiman Marcus, J.C. Penney and Brooks Brothers are among those that have already filed for bankruptcy or liquidation). This isn’t just a private sector phenomenon. As many as 20% of U.S. colleges and universities may also disappear in the next few years, via closure or merger. And this pattern will repeat across all areas of the economy.
Existing trends are already accelerating and becoming part of the New Normal. Recent bankruptcies make clear that e-commerce is expanding as physical retail shrinks. Similarly, telemedicine and work-from-home technologies are all experiencing super-charged growth. So is automation (eliminating workers is the easiest way to make a meatpacking plant COVID-safe, for instance).
A mixed picture for entrepreneurs. This will be the worst of times because we're in a recession, but also potentially the best of times because change and disruption often equal opportunity. For an entrepreneur with a new business in an area that’s shrinking (such as physical retail, hotels or international air travel), this is a horrible time to build a business. On the other hand, entrepreneurs focused on new and emerging trends will do well.
Expect discontinuities in areas including globalization, air travel, and leisure and hospitality. As we’ve learned, companies are global when things go well — but in a crisis, manufacturing facilities are national. At one point during the pandemic, China (with about half of all global mask production) limited the export of masks to ensure its own supply needs were met. Other countries took analogous steps. Going forward, look for more nationalism around critical supply chains, and more border controls as countries try to ensure they won’t be blindsided by the next potential pandemic. International air travel could take a very long time to return to 2019 levels.
Cities won't die but they will change. The "decline and death of cities" arguments are overstated and often ignore facts, academic research and common sense. As Nobel Prize Winning economists Banerjee and Duflo commented: “The fundamental qualities that made an area attractive in the first place are still there: a river, a central location, a long history, a good education system and the like. Businesses will want to invest, people will want to move back and the more a city is damaged, the faster its recovery will be.” Keep in mind New York City's recovery after the Spanish Flu. Its population grew, as did its role as an economic and cultural center.
Historically, higher density has resulted in higher productivity in cities compared to less dense areas, and that’s unlikely to change. Also, cities (in the American context) appear to be healthier places to live. As we are clearly seeing, the pandemic isn’t just a health issue for dense urban areas - it also impacts rural and suburban areas.
But we can expect radical changes, including in commuting and the relative costs of real estate. One simple example: When the pandemic ends, many people will want to resume normal office life. But many others will want to continue working from home. Consequently, companies may need less office space, and their remaining space may need to be reconfigured. Physical retail will also likely have a significantly reduced urban footprint, due to the shift to e-commerce.
Racial and socioeconomic inequality will increase. This crisis has disproportionately impacted communities of color (particularly black Americans) and low-income groups, and in the short run, that will be difficult to mitigate. Decades of systemic racism have left black Americans at the bottom of the economic system — “overrepresented in nine of the ten lowest-paid, high-contact essential services, which elevates their risk of contracting the virus. Thirty-three percent of nursing assistants, 39 percent of orderlies, and 39 percent of psychiatric aides are black.”
Health, education and income inequity
In addition, minority-owned small businesses are disproportionately concentrated in sectors adversely impacted by the pandemic. Further, black Americans are 50% more likely than white Americans to have no health insurance. Education disparities will widen. Children who attend private schools, or public schools in affluent areas, are likely to have better educational opportunities during this pandemic than students in poorer and/or rural areas. The latter will likely lose the equivalent of months of schooling due to closures.
Government’s role in our lives will grow. By the end of the pandemic it will be significantly larger and it’s unlikely to shrink quickly to pre-pandemic size. Ideologically, small government isn’t the Democrats’ policy position. Small government is the Republicans’ official position, but in reality, GOP political support is heavily concentrated in the states most dependent on federal money. The GOP is also increasingly interested in managing the economy to produce the results it wants for its voters (for instance, President Donald Trump’s strong interest in getting China to buy agricultural products from predominantly Republican states).
Leaderless and voiceless:America was the keeper of democracy. We were imperfect but we kept trying, until now.
The increased role of government in the economy will be a lingering bipartisan after-effect of this pandemic. I expect the federal government will run very large budget deficits for the foreseeable future, but the government debt will be manageable.
Inflation will remain under control. Deflation might be the real challenge in some sectors, such as hotel properties, malls and office space. The economy will likely have a significant amount of unused capacity (at least for the next couple of years), so I expect we’ll see a period of low interest rates and low inflation.
U.S. leadership in the global economy will be greatly reduced. We haven't handled this crisis well compared to our global competitors. Consequently, we’ll emerge on the other side in a weakened position. President Reagan described America as a ”shining city upon a hill,” but the fiascos of the Trump era will likely mark the end of that aspiration.Seriously, I doubt any country in the world finds our approach to this pandemic to be inspiring.
None of these predictions is certain, but taken together they are clues to the economy awaiting us on the other side of this nightmare.
Steven Strauss is a lecturer and visiting professor at Princeton University's Woodrow Wilson School of Public and International Affairs, an economic development specialist and a member of USA TODAY’s Board of Contributors.This essay is adapted from his June 22 report, "Some Emerging Hypotheses on the Economic Opportunities and Challenges of the Post-Pandemic World." Follow him on Twitter:@Steven_Strauss