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COVID Casts a Long Shadow: Structural Change Watch List

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There are two kinds of changes that economists watch:

  1. Cyclical changes, which play out quickly, over as little as a few month’s time; and,
  2. Structural or secular changes, which can take years (or decades) to form and work their way through the economy.

COVID-19 has laid bare many of the secular changes that we knew existed and too many ignored: inequalities in wealth, wages and access to education and health care. Low-wage households and minorities have been hit harder by the disease and economic losses triggered by efforts to mitigate its spread. Women have suffered the majority of job losses and, with children sent home from school, they could lose decades of progress toward equal pay. As little as a three-to-six-month break could deliver a permanent blow to their earnings relative to men.

Generationally, retirees were more vulnerable from a health perspective but more protected financially. Millennials suffered a second blow to incomes and careers in a little more than a decade, while generation Z - born in 1997 and after - is graduating into a recession much like their millennial siblings. The unemployment rate for 20 to 24 year-olds came close to 26%, nearly double the rate for 25 to 34 year-olds as states shut down.

This special edition of Economic Currents provides a list of changes in the economy that were exacerbated but not necessarily caused by COVID-19. The U.S. is unique among many of its western counterparts in that it appears willing to accept a higher rate of infections and less mitigation.

A deep distrust of government and corporate America will undermine everything from the tracking and tracing of infections to a willingness to accept a vaccine. This, combined with de-urbanization, growing inequalities, heightened stress levels, consolidation of small and midsize businesses, a blow to investment, a more militant China and a fractured world order, will undermine our potential to grow. Disruptions due to climate change will exacerbate those trends.

A Top 10 List
  1. Infections will remain elevated. Mitigation efforts have actually been challenged in the courts as they are seen as an affront to civil liberties. Masks, testing and the invasion of privacy tied to the tracking and tracing of infections are seen in a similar light. There is no way we would accept the parsing of phone records and credit card receipts necessary to trace the exposure of one infected individual. It is a close race among whom we trust least, the government or the technology companies scrambling to make tracer apps.

    The fallout for the labor force will be acute. Employers will have to prepare themselves for a spike in sick leaves and a surge in hospitalizations. COVID-19 is much more devastating than the flu even when it hits young, seemingly healthy people. The pickup in the rate of hospitalizations following Memorial Day celebrations was particularly worrisome as it suggested contagion rates in the U.S. could remain well above one per person.

  2. Vaccine acceptance will be tepid. A recent survey by the AP-NORC Center for Public Affairs showed that less than half of respondents over the age of 18 would actually take it. (See Chart 1.) Anti-vaxxers fear side effects from vaccines, including autism, while conspiracy theorists on the right fear that Bill Gates developed COVID to vaccinate them with a mind controlling bot. (Really?) Democrats are more likely to accept a vaccine than Republicans. There is even some resistance in the over-60 crowd.

    The uptake on flu shots has been on the rise in recent years but remains low. Just over 45% of adults got a flu shot during the 2018-19 season. Infectious diseases expert Dr. Anthony Fauci has warned that any COVID-19 vaccine will be more like that for the flu than polio or the measles; It could be effective for less than a year and need to be repeated like the flu vaccine.

    This will undermine the service sector rebound. Retail has taken it on the chin. Baby boomers, who account for a third of all spending, are particularly skittish as they are at higher risk for the disease and closer to retirement. It would be hard to imagine a packed stadium without the majority vaccinated or immune.

    The move toward discretionary services is an 80-year long trend. We are a social species and not about to give up our ability to travel and congregate. Hospitals and schools are likely to be the first to enforce vaccine rules. New York has already eliminated religious exemptions for vaccines in the wake of a measles outbreak in 2019. It would no doubt be among the first states to require a COVID vaccine once it becomes available.

    Then there is the challenge of who manufactures the first vaccine. Producers in the West are concerned that a breakthrough in China would not be freely shared. This is one of the reasons that Bill Gates resigned from the board of Microsoft to devote all of his time to combat the pandemic. He is currently supporting seven different vaccine candidates and the manufacturing capacity to get winners to market faster.

    International travelers will likely have to prove they are not carriers and/or immune with antibodies. Greece and other countries currently require travelers to complete two weeks of quarantine, despite its reliance on travel and tourism. Tokyo will not want to risk an outbreak during the already delayed 2020 Olympics, now scheduled for 2021.

    Chart 1

    Vaccine Acceptance Tepid

  3. “Black people are more likely to live in poverty, have less access to health care and die from COVID than other races.”
  4. De-urbanization will accelerate. COVID has increased the focus on working from home and prompted many companies to reevaluate executive travel. Most professional service firms have opened the door to work-from-home options through yearend 2020. Others are looking at significantly smaller office footprints with staggered work schedules and social distancing reinforced. Silicon Valley has had to completely rethink open-plan offices.

    The goal will be to socialize and onboard their employees, without risking contagion. Later, the push will be to get people into more affordable offices outside of urban centers, where housing is more affordable. Facebook has already said that it will reduce workers’ compensation if they move to a city with more affordable housing and a lower cost of living.

    Telemedicine is taking off, which will change the nature of routine medical visits. This could increase access to much needed medical care in rural areas, where specialists are scarce. The largest hurdle is limited access to broadband, which inhibits the speed with which we can communicate.

    A similar problem was seen with the shift to online education, which accelerated the inequality in education between affluent and poorer students who have less access to high speed Wi-Fi. Students in rural areas have often relied on access to free Wi-Fi in public places including fast-food restaurants. Some were forced to quit school once classes moved online as those places temporarily closed.

    Many workers lack access to broadband needed to work efficiently. Even the technology sector is feeling the pain because sales were still done face-to-face via travel. Salespeople relied on in-person meetings to sell. Many put a premium on access to airports over broadband when deciding where to locate.

    The downside is Zoom fatigue and the stress of sheltering in place. The emotional toll for workers to be “on” all day with video conferencing can be substantial. Breaks for water cooler talk, which spur innovation and morale, are also lacking along with informal networking opportunities. Our youngest workers are already being hurt by graduating into a recession.

  5. Stress Levels Escalate. A recent household pulse survey by the Centers for Disease Control and Prevention (CDC) revealed a sharp increase in the incidence of anxiety and depression. Almost 50% of young adults (aged 18-29) reported increases in the wake of mandated lockdowns. Reports of anxiety among the young were already elevated.

    Women and those with less than a high school diploma, who were most at risk of layoffs in the service sector, were harder hit than men and those with higher education levels. This was at the same time that reports of anxiety and PTSD among first responders were already on the rise.

    Teleworking and the lack of social interaction we are experiencing during COVID will only exacerbate those trends. Recent research reveals that the relationships we form at work, with our colleagues and our bosses, are the most important determinants of “meaningful” work.

    Those who enjoy purpose in their work are more likely to engage in training and advancement exercises. They are also more reliable, less likely to call in sick and more likely to postpone retirement. It may be easy to see how your work matters now if you are a first responder or restocking grocery store shelves. That is not the case for many who work solely from home or can’t find a job in an economy that is struggling to reopen.

    It is not hard to see how the economy contributed to a sense of anxiety even as it was improving in recent years. The Federal Reserve was humbled by the absolute failure of the economy to lift wages in a world where the unemployment rate had fallen to a 50-year low. The economic aggregates were clearly not capturing inequalities as they compounded.

  6. COVID-19 has exacerbated existing inequalities. Black people are more likely to live in poverty, have less access to health care and die from COVID than other races. Deep-seated bias in everything from access to education, housing, incarceration rates, police brutality and social networks has left them lagging whites and other minorities. The bias is systemic, persistent and deadly. Slavery in the U.S. persisted longer and was more tied to one specific race than elsewhere in the world.

    Black people were the last ones to find jobs in the recovery and the first to be cut, once layoffs hit. Their unemployment rate tends to take years longer to decline after a recession and continued to rise even as the overall unemployment rate fell in May.

    All of this has combined with a high level of stress and a large number of people home, unemployed, young and who are much more diverse than previous generations to stoke social unrest on a global scale. Those tensions will not abate anytime soon. Millennials now dominate the labor market and include 44% minorities. Generation Z is even more diverse; whites are in the minority among children under the age of 12.

  7. Small and midsize companies consolidate. Defaults, bankruptcies and firm consolidation are all expected to accelerate, which will cause the second shoe to drop: white-collar layoffs. That, combined with the dire situation that state and local budgets are facing, could mute the recovery in jobs and the drop in the unemployment rate.

    The Federal Reserve has flagged defaults and bankruptcies as risks to bank balance sheets and financial stability down the road. Those are some of the reasons Fed officials have discouraged banks from paying dividends. The Fed is worried about the need for banks to have a cushion against future losses.

    One could argue that at least a portion of the surge in stock valuations in the U.S. is driven by the bet that more profits will be concentrated in a few, largely high-tech firms. The downside of such market consolidation is that it could undermine dynamism and job generation. That could exacerbate inequality between winning and losing firms and undermine potential growth. Less dynamism could also undermine innovation and productivity.

  8. Chart 2

    Election-Year Tariffs
  9. Pandemic triggers risk aversion. The fear of pandemics is expected to siphon funds from investment. More will initially be spent on creating social distance in offices, enabling staff to work from home and keeping down the risk of contagion.

    Firms will seek to shorten supply chains to hedge against future disruptions. This could accelerate the move that started out of China in response to the trade wars. Mexico was expected to benefit most from the shift, but contagion in Mexico is still rising quite rapidly. The irony, of course, is that it wouldn’t have mattered where you were producing during a pandemic.

    Production came to a virtual standstill in every region of the world. Even states within the U.S. closed and reopened at different times.

  10. China becomes more aggressive. The blame game over COVID has intensified tensions between the U.S. and China at a critical juncture. China can’t begin to meet the obligations in its Phase One trade agreement. At the same time, the Chinese government is becoming more brazen in human rights abuses.

    So far, the U.S. president’s bark has been worse than his bite. He has refused to sanction Chinese President Xi Jinping directly for his takeover of Hong Kong’s national security apparatus. Congress has been more aggressive and forced the U.S. president’s hand on sanctions over China’s imprisonment of an estimated one million Muslim Uighurs in camps in Xinjiang province.

    China is already an election year issue. Blaming China is a bipartisan sport. Conditions will no doubt get worse before they get better. Tariffs that were lifted to allow more personal protective equipment (PPE) into the U.S. are expected to be reversed. Tariffs on a broader array of clothing, shoes, toys, electronics and critical parts for manufacturing are expected to rise at least temporarily in the run-up to the election. (See Chart 2.)

    This will further undermine the struggle to recover from COVID, while encouraging Chinese aggression on the world stage. China has already dramatically expanded its military presence in the South China Sea and is now filling a void left by the U.S. with many of Asia’s less developed economies. Vietnam has been a particular target.

  11. De-globalization accelerates. Last August, the Peterson Institute for International Economics (PIIE) assessed the rise of nationalism in the Group of 20 countries. It found that the majority of new and existing political parties are nationalists. For developed economies, nationalism included immigration curbs, tariffs and quotas. For the developing economies, nationalism focused on subsidies for favored industries.

    Efforts to blame China for the outbreak and interruptions to supply chains will accelerate that trend in the near term. Travel bans have erected another hurdle to international trade flows. The irony is that the pandemic is global in scope. More regionalized supply chains would have done nothing to stem plant closings in the wake of outbreaks. Government aid and protection for politically sensitive industries will only exacerbate the breakdown in trade flows post-COVID.

  12. Climate change intensifies. COVID has not stopped some of the largest polluters from rolling back environmental regulations, including the U.S. Deforestation in Brazil has accelerated as President Jair Bolsonaro has followed the lead of the U.S. and made further reductions in environmental protections. Economic losses to COVID have made it easier for him to justify deforestation for loggers, miners and farmers.

    The National Oceanic and Atmospheric Administration (NOAA) Climate Prediction Center is forecasting an unusually busy hurricane season. Forecasters expect to see a flurry of severe storms, up to 10 hurricanes with winds of 74 miles per hour or higher and three to six hurricanes with winds of 111 miles per hour or higher. This, coupled with the increased accuracy of NOAA in forecasting severe weather, suggests another blow to the economy this summer.

Bottom Line Much like the terrorist attacks of 9/11, COVID-19 is a watershed event. The risk of pandemics will have to be hedged from now onward, which will have a long-term effect on the potential for the U.S. economy to grow. COVID has acted as an accelerant to a fragmenting, hostile world, which is badly in need of reform. It could also act as a catalyst for reforms that are essential to creating a better and more productive future.

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