Longer Term Conjectures

The business world talks frequently of ‘disruption’ but Covid-19 is viscerally showing us the true meaning of the word. Here are some speculations as to what might be some of the long term consequences of the crisis following up on three earlier pieces – what businesses should be doing, how the economy will be affected and what governments can do.

If interested please sign up for my London Business School webinar tomorrow on the topic. Following the webinar I will be releasing my in depth article on The Economy in the time of Covid-19.

Historians find it convenient to earmark certain dates and years as turning points in history. For instance, the 2007/8 Global Financial Crisis is widely seen as having ushered in a ‘new normal’ and a shift in the political debate. In the midst of the current crisis it is tempting to assume that Covid-19 will do the same (although hopefully it won’t be called the ‘new new normal’). It may be that just as New Year Resolutions fade away in February that won’t be the case but the scale of the current disruption suggests otherwise. Here are some non-fact based conjectures. Like New Year’s Resolutions who knows how they will stand up to review in a years time.

Zeitgeist

In Laura Spinney’s revealing account of the Great Influenza Pandemic she notes that in the decade afterwards “the artistic world turned its back on science and progress – a decade in which artists said, we had nothing on the ancients after all". This suggests a potential magnification of the pre-Covid 19 sentiment of a world which has ‘had enough of experts’. Similar dents to progress and science will be made if lockdowns do not eradicate the virus or even worse prove to have been alarmist given the ex post assessment of the threat.

More positive scenarios are also possible. If science comes up quickly with a vaccine and reliable testing helps minimise the economic costs whilst containing the infection then the power of expertise and science will be enhanced not diminished.

The crisis is also likely to lead to increased acceptance that there are some problems only governments can solve. At the heart of the public health and economic crisis is the notion of an externality. In public health that’s because individuals may care about their own exposure to infection from Covid-19 but not enough about their risk of infecting others. Therefore shutdowns/shelter at home policies are needed to stop the disease spreading. In economics the problem is that as firm’s layoff workers they don’t take into account how that in turn lowers demand in the economy and precipitates further layoffs.

In the case of such externalities, individuals left to their own devices don’t take appropriate action from the point of view of the collective good and so governments can intervene to improve the situation. With the world facing the challenge of how it adapts to AI and robotics, how it achieves environmental sustainability and supports an ageing society this acceptance of a critical role for government will be extended.

The extreme nature of this experience has also brought into the Overton window many policies that previously have been considered radical. When the US government is looking to introduce essentially a form of UBI and many governments seriously countenancing ‘helicopter money’ the policy framework now looks very different. When central banks introduced Quantitative Easing during the 2007/9 financial crisis it was referred to as ‘non-conventional monetary policy’. More than a decade later it can hardly be called ‘non-conventional’ and perhaps the same will hold true for helicopter money in a decades time.

Politics

Politics as well as policy is likely to be deeply affected. The political consequences of the 2007/8 crisis took around a decade to fully emerge but this time around will be felt more swiftly. The 2007/8 crisis was typical of a financial crisis and took several months to spread out to the broader economy. The impact of Covid-19 is being felt much more swiftly across far more sectors and in terms of employment mostly outside the financial sector. As a consequence, we can expect the political feedback loop to operate much faster this time around.

On many measures, several countries entered this crisis with growing problems of distrust between government and people and splits within society. This crisis has the capacity to either magnify or diminish those problems and splits. Governments who poorly implement policies or who implement policies different from other nations and which lead to bad mortality outcomes will experience large increases in distrust.

However, there are more positive scenarios available and a potential shift in the nature of debate. The economics literature when discussing how governments should respond to technological change and globalisation continually draws a distinction between the needs and circumstances of ‘skilled’ and ‘unskilled’ workers. Today another distinction is being used -‘essential’ and ‘non-essential’ workers - and this split is often very different from that of skilled and unskilled. The skilled/unskilled distinction tended to be driven by how labour markets operate. The essential/nonessential distinction is a value judgement not based on market valuation but social contribution. As with the shift in importance of the government relative to the market so too our broader narratives will change because of this crisis.

The crisis also has the ability to rejuvenate civil society. In the UK more than 500,000 have so far volunteered to assist the National Health System during the crisis and informal community schemes to support the vulnerable are mushrooming. Society faces many future challenges with AI and robotics and a strong civil society will be crucial if these are to benefit the whole of society. This crisis could be a galvanising force for a different social dialogue.

At a global level there will also be impacts. Those countries who handle the crisis best will benefit reputationally and economically and through their unilateral assistance towards others can enhance their global influence. It is too early to announce who those winners and losers are but currently China looks set to play this role.

This matters as what has been sadly lacking in response to a global pandemic has been global cooperation. Whilst the commonality of Covid-19 has been acknowledged a solution to it has not been shared. As countries exit from containment at different speeds this will undoubtedly produce tensions. Whilst these are global problems the issues will play out acutely in the EU.

The economy too will be different even when it returns to its pre-crisis level. One impact will surely be a larger health sector as countries invest in the capacity to support further outbreaks of Covid-19 or future pandemics. Fan, Jamison and Summers (2016) argue that the expected annual losses from future major pandemics are around 0.7% of global GDP (larger than estimates of the impact of climate change). This suggests much larger spending on preventative measures.

It also seems likely that competition will be adversely affected by the crisis. At a local level undoubtedly a large number of SMEs will be worst affected by the crisis leading to greater market power for those that survive in the short run. Even in large scale industries mergers will also offer an option to improve mark ups and help balance sheets recover faster. If output remains less after the crisis mergers will help avoid competition further reducing margins.

·     If science conquers the virus then we are likely to see a resurgence of technological optimism. If it doesn’t expect a culture that downplays our sense of historical progress

·     The crisis has increased the sense that there are some problems only governments can resolve which will have implications for future debates about AI/Robotics, Sustainability and an Ageing Society

·     There is likely to be a shift in narrative away from economic towards social value added. Already the distinction between skilled/non-skilled workers has been replaced by essential/non-essential

·     Potentially this crisis will lead to a resurgence of civil society as it recognises its power and fundamental importance

·     If output does not return to its pre-crisis level then expect less competition and higher mark ups

Andrew J Scott is a Professor of Economics at #LondonBusinessSchool, Research Fellow Centre for Economic Policy Research and author of the "100 Year Life" and the forthcoming "The New Long Life". 

Twitter @ProfAndrewScott · LinkedIn @ProfAndrewJScott · Website

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