Rebounding from the Pandemic Will Take Longer Than We Think
With lockdowns ending, business and political leaders are cautiously predicting an economic revival in late 2020 or early 2021. It’s true that the pandemic has not played out as badly as predicted, and federal stimulus efforts have prevented an outright depression. Yet it may take many years for a full recovery. Structural shifts in the economies of the United States and other wealthy countries will make it difficult to regain the levels of 2019.
Delayed Recovery in the Great Depression
Economic recoveries depend on a complex mix of business sentiment and structural factors. The Great Depression of the 1930s lasted a decade not just because the severe initial drop in activity, but because of underlying economic weaknesses. A major problem was the tight money supply, a problem we aren’t having this time thanks to the aggressive work of the Federal Reserve and other central banks.
But another problem had to do with an ongoing shift in the American economy. Commodities and other producer goods had long dominated the gross national product. Prosperity depended on efficiently producing and distributing agriculture, steel, oil, and other basics. But by the 1920s, the U.S. had grown so affluent that these sectors were no longer growing at the rate of previous decades. Branded consumer goods were starting to take off, but these were still a small proportion of GDP. We didn’t add automobiles to the Consumer Price Index until 1935.
For farmers the Great Depression actually started in the mid-1920s, as the price of their goods fell drastically. Foreign farmers were generating surpluses large enough to compete on world markets, while mechanization everywhere was raising output. Something similar, though less dramatic, started happening in metals, energy, and other commodities.
The Great Depression hit every industry hard, and not until 1933 did the economy slowly begin recovering from its depths. But then in 1937 another recession hit, and the economy stayed in the doldrums until the ramp up to World War II in 1939.
The 1937 downturn is often called the “Roosevelt Recession,” because FDR’s tax increases, court-packing scheme and other aggressive moves frightened executives and investors. But as the economic historian Michael Bernstein has argued, equally important to the slow recovery were structural imbalances. Most companies still made commodities and producer goods, and they were leery of putting money into industries with declining margins. Companies that made branded consumer goods, from automobiles to toothpaste, had bright prospects, but they were too small to rescue the economy by themselves. And they weren’t going to invest aggressively until they saw strong general prospects. After all, most of their customers worked in commodity businesses, so demand remained low.
The Pandemic’s Structural Shifts
The American economy is arguably undergoing a similar structural adjustment now, from what we can call analog to digital businesses, accelerated by the pandemic. Bricks-and-mortar retail, like agriculture in the Great Depression, had already been struggling for years. Many stores are likely to close permanently now, and few new stores will replace them. Commercial real estate will likewise suffer not just from closed stores but also from overbuilt office space, due to higher rates of working from home.
The big question mark is the face-to-face services sector. This sector boomed in the last decade, part of the long-term economic shift from manufacturing. We hired or patronized ever more restaurants, educators, consultants, therapists, coaches, tour guides, caretakers, and other service providers. Almost all of that face-to-face work stopped for months, replaced by online interaction.
Policymakers are assuming that the service sector will soon resume its place in the economy. Restaurants and salons are reopening, consultants are getting on airplanes, we’ll go back to our regular Pilates fix, and the economy will recover. Schools, theaters, and stadiums will follow by the fall.
But here’s a sobering thought, courtesy of a 1909 short story by the British novelist E. M. Forster (written right after A Room with a View). In “The Machine Stops,” he described a future world of advanced automation. Most people have little actual work to do, and they spend their time at home on something we would recognize as the internet. Travel is easy enough, on grand airships flitting across the continents, but people are content with the delights of their screens. They rarely leave their solo apartments, and prefer videochats with their friends to actually visiting them. Everyone keeps their distance, actually touching someone is vulgar, and all the excitement (at least for educated people) is around giving, attending and discussing online presentations. Hearing about a place is better than visiting it. People are caught up in ideas, or what we now call memes.
In the story, the protagonist’s son tries to convince her to live a more authentic life and rely less on the all-providing Machine. But she’s so caught up in her screen life that she can’t even understand what he’s saying. When the Machine stops, everyone is helpless.
The conventional wisdom nowadays is that people will always want personal contact. That’s why social distancing has been so hard, and why so many shopping malls in the 2010s became leisure centers with movie theaters, restaurants, salons and other experience-based retailers. But what if our extended time at home changes habits? Thanks to everything from data analytics and artificial intelligence to virtual reality and 5G, the online experience is more engrossing than it was even a few years ago. The pandemic gave the population a forced immersion in the digital economy, with far-reaching consequences. Forster’s story suggests that our assumptions of the need for close contact are wrong – or at least that we’ll need more encouragement to venture out than policymakers expect.
Of course, restaurants, movie theaters, salons, and studios are certainly coming back to some extent, and full recovery won’t take a decade. But what matters is the degree of confidence entrepreneurs and investors have in the face-to-face service sector. If they’re slow to put up capital and ideas for adjustments to the post-pandemic world, and then consumers prefer to mostly stay home, we may be looking at a long and painful recovery.