Home > Uncategorized > More thoughts on the post-pandemic economy

More thoughts on the post-pandemic economy

from Dean Baker

I have written before on the post-pandemic economy and how it should actually provide enormous opportunities, but it is worth clarifying a few points. First and most importantly, there is an important measurement issue with GDP that people will need to appreciate.

It is often said that GDP is not a good measure of well-being, we see this in a very big way in the post-pandemic period. It is likely that many of the changes in behavior forced by the pandemic, first and foremost telecommuting, will be enduring.

Most immediately, this will show up as a sharp drop in GDP. We will be consuming much less of the goods and services associated with commuting to and from work. This means that we will be driving less. That means we will be buying less gas and needing fewer cars, car parts, and car repair services. We’ll also need less auto insurance. In addition, there will be many fewer taxi or Uber trips, as well as trips on busses, trains, and other forms of public transportation.

There is also an economy built up around serving the people working in downtown office buildings. This includes the offices themselves and the people who service and clean them. There are also restaurants, gyms, and other businesses that serve the people who come into the city to work each day. And, there are all the items that people have to spend money on for office work, such as business clothes and shoes and dry-cleaning services.

We will see a huge reduction in demand in all these areas if much of the work being done on-line stays online. We will also see less business travel, which means fewer airplane trips, taxi rides, and stays in hotels.

This fall into demand will translate into a large loss of GDP, but it translates into very little by way of real loss in well-being. This doesn’t mean there will not be some loss. People may miss seeing work colleagues on a daily basis, or the opportunity to meet up with friends for lunch near the office. Some people may actually enjoy business travel. But the drop in GDP will dwarf whatever losses of these sorts people may feel, and in most cases, they will be offset by gains, such as not having to spend two hours a day commuting and having more time to spend with friends and family.

So, let’s say that we see GDP drop by 3.0 percent ($660 billion a year), how should we think about this? (This is a very crude guess, not a careful calculation) On its face, that would look like a very severe downturn. In the Great Recession, GDP only fell by 4.0 percent from peak to trough, so this looks like a very serious hit to the economy.

But that really misses the story. To take an analogous situation, let’s say for some reason, such as better diet, more exercise, or an act of God, everyone’s health got hugely better. Imagine that we could have the same outcomes in terms of life expectancy and quality of overall health using half as many health care services. This would mean half as many doctors’ visits, surgeries, MRIs, prescription drugs, and everything else in health care that costs money.

This reduction in health care consumption would mean a drop in GDP of more than 8.5 percent, yet everyone’s health would be just as good as it had been previously. In this story, no one in their right mind would be concerned about the loss of GDP, what we value is health, not the number of times we see a doctor or the amount of drugs we take. The decline in the resources needed to maintain our health is effectively an increase in productivity. We have seen a jump of 8.5 percent in the level of productivity, as we can get the same output as we had previously, with 8.5 percent fewer inputs.[1]  In other words, we are much richer as a result of this remarkable improvement in the public’s health.

We should think about my hypothesized savings of 3.0 percent of GDP on work-related expenses the same way. We had been expending a large amount of resources to maintain an office work system that is no longer needed. This is effectively a huge jump in productivity. By comparison, over the last 15 years, productivity growth has averaged just 1.3 percent annually.

This matters hugely in how we think about the post-pandemic economy. If we look at the lost GDP associated with fewer work-related expenses we would think that the economy is really suffering. However, if we think of this as big jump in productivity, then it effectively means that we have extra resources to address long-neglected social needs.

And, these resources should be readily visible in the form of all the workers who are no longer employed in restaurants, gyms, dry cleaners, or the making, servicing, or driving of cars. These are people who can be instead employed providing child care, senior care, doing energy audits of buildings, installing solar panels and energy-conserving appliances, or other tasks that address neglected needs.

As I have pointed out before, we need not think that every person who lost their job waiting tables will get a job installing solar panels or as a child care provider. That’s not the way the labor market works. People in fact switch jobs frequently. In a normal pre-pandemic economy more than 5.5 million people lose or leave their job every month. If we create jobs in installing solar panels, energy audits, and child care, people will leave other jobs to fill these newly created positions, which can leave openings for laid-off restaurant and hotel workers to again get jobs in hotels and restaurants, as well as other sectors.

The fact that we have a large number of idle workers, because of this effective jump in productivity, means that we should not be shy about large amounts of government spending to address these unmet needs, even though it will mean large budget deficits. For the near-term future, we will not have to worry about deficits creating too much demand in the economy and causing inflation. In the longer term, excessive demand and the resulting inflation can be a problem, which will require addressing the factors that redistribute so much money upward (e.g. patent and copyright monopolies, a corrupt corporate governance structure, and a bloated financial sector), but that will not be a problem as we recover from the recession.

If we do let obsessions with government deficits and debt curtail spending, then we can expect to see a long and harsh recession. To set up the analogy, suppose there was a 3.0 percent jump in productivity, but there was no increase in workers’ real wages. Assume all the money went to higher corporate profits. Since profits have little relationship to investment, there is no reason to expect any notable increase in investment. Let’s assume that consumption spending out of dividends and share buybacks is limited.

In this case, the economy can produce the same output with 3 percent fewer workers, meaning that 4.8 million people will be out of jobs. And, that situation can persist for a long period of time, since there is nothing inherent to the workings of the economy to bring us back to full employment.

That would really be a disaster story, especially if the correct figure for this implicit jump in productivity is something more like 5 percent, or even more. The key to preventing this sort of disaster is to understand that the reduced spending on work-related expenses is effectively an increase in productivity.

And, we also have to recognize that when we have a serious problem of unemployment, the failure to run large deficits is incredibly damaging to the country. Millions of workers will needlessly suffer, as will their families. And the failure is increased when it means not spending in areas that will have long-term benefits for the country, like child care and slowing global warming. It is tragic that deficit hawks are able to do so much harm to our children under the guise of saving our children.

[1] For those being technical, I am not using “productivity” precisely here. A reduction equal to 8.5 percent of GDP in the value of goods or services devoted to health care, does not necessarily mean that the amount of labor used in the health care sector has fallen by an amount equal to 8.5 percent of the economy’s annual labor usage. But I’m ignoring this point for now.

  1. Ikonoclast
    August 13, 2020 at 11:43 pm

    GDP is objectively meaningless. Economics is a pseudo-science. Economics claims to have laws but it does not and can not have laws. This can be demonstrated surprisingly enough by an investigation of array games. In particular, I mean array games which can be represented by finite state machines.

    If I investigate the “laws” of an array game (like chess), I will find that the “laws” are dependent on the rules. First, we need to clarify terminology. The FIDE Laws of Chess are not “laws”, they are “rules”. A rule is a prescription for action by an agent. The rules of chess prescribe the legal moves in chess. When humans, as agents, play chess they (usually) obey the rules of chess, especially in formalized competition.

    Rules, as prescriptions, set up a formal system. The interesting thing is that formal systems set up by rules usually have both an agent-behavioral component (agents obeying or disobeying rules) and a materially actualized component. The materially actualized component of chess is the board (a physical representation of an array), the chessmen (wooden carvings or molded plastic pieces) and even the physical rule book with rules materially actualized as inked symbols on paper.

    Adept chess players can play without a board or pieces, maintaining the array in their brains, provided they mutually understand and accept the traditional rules of modern chess. In New York on April 27, 1924, Alexander Alekhine broke the world record for simultaneous blindfold play when he played twenty-six chess club opponents, winning sixteen games, losing five, and drawing five after twelve hours of play. What roles do the board, pieces and physical rule book play? They are physical place markers for those with less memory and mental abilities. They are a social validating, facilitating and coordinating system. They validate the game as socially and physically real. They multiply the power of the less adept providing physical markers to assist them to play the game. They function as an external physical/logical check on claims (that moves and captures are legal) because memory is imperfect and humans can be dishonest.

    This brings us to laws. Does a game like chess truly have laws as opposed to mere rules? It appears to do so at first analysis. One consistent “law” of chess is that a piece in the center of the board, ceteris paribus, “controls” (can move to) more squares than a piece at the edge of the board. This is due to the move rules and the array limits or board edges. This is analogous to the fact that I can sweep a greater horizontal area with my outstretched hands while standing in the middle of the room than I can while standing in the corner of the room, again ceteris paribus. This is a key point. When a logical array, plus rules for its use, mimic a real aspect of the real world (2 dimensions of space in this case) and the rules also mimic other aspects of the real world (non-occupation of the same space (array element) by two objects then the system develops what might be called “pseudo-laws”. They are really meta rules generated by the rules. The system begins to demonstrate what can be mistaken as law-like behavior. We begin to feel, intuit and believe that our formal system has laws just like the real world. This is an intellectual illusion.

    This is easily demonstrated by varying the rules to subvert the pseudo-laws or meta rules observed for a given rule set. If we give chess a “wrap-round” move rule, then a piece at the side of the board can now control the same number of squares as a piece at the center. The “law” is exposed as a pseudo-law. This would also radically change the game of chess. Let us call the new game “Wrap-round Chess”. It is clear straight away that early piece exchanges are possible, like a first move queen swap and tit for tat rook captures. These possibilities may well “deconstruct” and ruin the game as it were.

    The above insight is useful. Extant rules in political economy, for example, construct a game of a certain kind. The rules do not generate genuine laws (inflexible correlations of the objective universe like the laws of thermodynamics ) but only pseudo-laws which can be annulled or subverted by targeted rule changes. On the other hand, we can see that the rules generate playable games and unplayable games or perhaps more playable games and less playable games. And indeed the playability of the game of political economy is class-mediated, opportunity mediated, education mediated, intelligence mediated and so on. Different individuals will have different experiences and different opinions on the playability of the extant political economy game, each from their own perspective.

    Rather than viewing economics, or rather political economy, as a scientific, objectively law-bound discipline we should view it as a (very serious) competitive-cooperative game with all rules open to democratic amendment. Rather than uncovering laws and law-bound behaviors in the game itself we will only uncover games which most want to play or most do not want to play and perhaps more importantly games which are unplayable as well games which are playable. For example, the current game of “destroy the biosphere for the short term wealth gain of a few” is not playable in the long term or even medium term. This last issue, where our legal, ownership and financial games which only have pseudo-laws direct a real economy with real laws to clash with a real biosphere which also has real laws, would be grist for another post of course.

    The worst macro mistake to make is to assume that our legal, ownership and financial game rules construct a law-bound system rather than a mutable and modifiable game system. The worst thing to do is to hare off looking for the non-existent laws of our socially constructed competitive-cooperative game when the constructed rules of the game simply need changing, albeit taking cognizance of democratic and real system feedback. This last is a complex, messy, practical, pragmatic and empirical process. Axiomatic theorems and complex equations based on such axioms do not apply. Empirical (scientific) ontology, moral philosophy and possibly even finite state machine game theory do apply.

  2. Ken Zimmerman
    August 20, 2020 at 2:10 pm

    Among scholars and even some ordinary folks It is common to note that the First World War killed Romanticism and faith in progress. (Which makes me wonder what has replaced faith in progress, or has it been replaced at all.) But if science facilitated industrial-scale slaughter in the form of the war, it also failed to prevent it in the form of the Spanish flu. The flu re-sculpted human populations more radically than anything since the Black Death. It influenced the course of the First World War and, arguably, contributed to the Second. It pushed India closer to independence, South Africa closer to apartheid, and Switzerland to the brink of civil war. It ushered in universal healthcare and alternative medicine, our love of fresh air and our passion for sport, and it was probably responsible, at least in part, for the obsession of 20th century artists with all the myriad ways in which the human body can fail. ‘Arguably’ and ‘probably’ are crucial qualifiers when discussing the Spanish flu, because in 1918 there was no way of diagnosing influenza, and hence no way of knowing with reasonable certainty that what those alive then believed it was, was what it was–any more than we can be certain that the bubonic plague (or one of its variants, pneumonic plague) caused the Black Death in the 14th century. What is not arguable is that the 1918 pandemic speeded up the pace of change in the first half of the 20th century and helped shape our modern world.

    If all of this is true, how come we still think of the Spanish flu as a footnote to the First World War? Have we really forgotten it? Terence Ranger (prominent British Africanist, best known as a historian of Zimbabwe (1929-2015)) thought we had. But if he were still alive today, he might hesitate before repeating that claim. If so, then credit must go to a vast collaborative effort. The Spanish flu can no longer be told without the contributions of both historians and scientists, including social scientists. Science tells the story up to the threshold of history, across the tracks of prehistory that look empty but are, in fact, covered in an invisible scribble; and that molded events in 1918 just as much as what came later. History takes it up where the scribble becomes readable, and science sheds some light back from the present. In another hundred years, science and history likely will themselves have been transformed. There might even be a science of history, in which theories about the past are tested against computerized banks of historical data. That kind of approach will likely revolutionize the way we understand complex phenomena such as pandemics, but it is still in its infancy. There is one thing we can already say for sure, however. By the bicentenary of the 1918 pandemic, historians will have filled in more of the blanks, and the light shed by science will be brighter.

    COVID-19 is not the Spanish Flu. At least not yet. But it will have broad and long-range consequences. We need to begin now to plan the research and collect the data to determine just what those consequences are. COVID-19, in conjunction with actions of Donald Trump, political reactionaries, and some obvious Fascists have enflamed the “war” over certain cultural values and norms. Particularly, religious, and political norms. The same combination has placed American economic life under great stress. And to a lesser extent damaged all world economies. Not all the consequences of either the cultural wars or the economic stress may ever fade away. Still the same combination is forcing the socialization of American youth to either be put on hold, modified in unexpected ways, or fail in equally unexpected ways. Finally, COVID-19, et al have moved the US democracy closer to collapse than at any time in its history. We do not yet know the longer-term consequences of these and other trends not you recognized. We need more research efforts.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.