The Economy After The Shutdown

Michael Kurth Thursday, June 18, 2020 Comments Off on The Economy After The Shutdown
The Economy After The Shutdown

After eight weeks of quarantining and social distancing, it is nice to see some measure of normalcy return as the state begins to relax restrictions on businesses, allowing some to open back up under strict guidelines. But don’t let this fool you into thinking it is time to take a victory lap over COVID19; the virus is still among us. According to the Centers for Disease Control, the death toll in the U.S. just passed 100,000 and we still have more than 1.2 million active cases. Moreover, around the globe there has been no “flattening of the curve,” as 100,000 new cases are being reported daily.  

Some people, most notably President Trump, are hoping the economy will take off like a rocket once the restrictions are lifted. But others fear it may be the virus that takes off instead of the economy. Although the number of new infections is tapering off in metropolitan “hot spots” like New York City, New Orleans, Detroit and Chicago, new cases of the virus appear to be on the rise in the rural heartland.  

History will give us the answer. But while shutting down the economy may have been necessary to slow down the spread of the virus, our economic recovery may not be as simple as lifting the restrictions and expecting everything to revert to the way it was before the pandemic.  

That is not going to happen. The road to economic recovery will be a very different path from the road we were travelling.

For example, I suspect it will be quite a while before people rush out to book a cruise, head for a tailgating party before a college sporting event or board a crowded plane to visit family and friends for the holidays. Likewise, many companies are going to be reluctant to book conventions or exhibitions for their top employees or biggest customers at expensive hotels and resorts.  In the “new normal,” business meetings are likely to be conducted via Zoom and many more workers will be doing their jobs remotely from home with only an occasional visit to the office.  

Many small businesses that are trying to reopen are having trouble finding enough employees because they have to compete with the hefty unemployment checks their former employees are receiving. And reopening is not as simple as turning a key and opening the door.  The steps they have to take to assure their customers they will be as safe as possible as well as the measures required by the government for re-opening can be expensive and difficult for cash-strapped small businesses to afford.

But from a broader perspective, when the COVID-19 pandemic broke out, the world was in the midst of an economic revolution similar to the industrial revolution. President Trump likes to talk about how he created the greatest economy in the history of the world in just three years. But that is not close to being true. Yes, he presided over a record-breaking stock market boom. But it takes more than a booming stock market to transform an economy. (The stock market had a similar boom during the Roaring Twenties just before the wheels fell off and we plunged into The Great Depression.)  

In my opinion, the greatest economic era in our history was from 1865 to 1890, when the United States went from a war-torn, underdeveloped third-world country to a global industrial power in just 25 years. We built the intercontinental railroad; strung telegraph, and later telephone, lines across the nation; developed electric lights, electric motors, combustion engines, refrigeration and photography. Even the typewriter transformed how work was performed. Our population tripled as immigrants poured into our cities to work in our factories and the West was settled to provide food for the new bustling industrial cities. Industrialization changed all aspects of American life: how we traveled, how we shopped, how we communicated, where we lived and what we ate.

But economic progress always brings what economists call “creative destruction” as the new technology replaces the old way of doing things.  Change is good in a competitive economy because it creates opportunity, as businesses must either evolve or become dinosaurs. This was where we were when the COVID-19 pandemic came along. The global economy was rapidly transforming from the industrial age based on the application of machines to production to a post-industrial economy based on the application of computers to production.  We could see it all around us: brick-and-mortar stores were closing as people began shopping on-line, cell phones replaced landlines; Uber was replacing taxis and buses; the internet was replacing daily newspapers; social media was replacing physical gatherings and robots were replacing assembly line workers.

Global supply chains stretched around the world, allowing distant countries to use their comparative advantages to produce standardized components that could be shipped and assembled in their final markets. The automobile was once the symbol of American industrial prowess. Our cars were made from iron ore mined in Duluth that was turned into steel in mills in Pennsylvania and Ohio then molded into frames and assembled in Michigan. (I was once one of those assembly line workers.) Today, an “American car” consists mostly of components produced around the globe then shipped to the U.S. where they are assembled by robots. And it is not just cars and it is not just the United States. This is the new global economy.

These global supply chains were disrupted by President Trump’s tariff wars, but they were really dealt a severe blow by the corona pandemic. It’s like when you are trying to fix your lawn tractor and you need one small part, but you just can’t find it anywhere.

One side effect of the pandemic may be that it is forcing Americans to adapt and use new technology at a faster rate. The United States was not leading the way in this new technological revolution, so we have some catching up to do. If you want to find industries that could prosper from the pandemic, look at those that are most technologically advanced. If you are looking for the dinosaurs, you will generally find them in the public or regulated sectors of the economy where they are shielded from the pressure of competing for consumer dollars. 

I would start with the post office. The Democrats won’t like this because the postal workers unions are a powerful part of their political coalition. But the post office is a dinosaur. Millennials have to go to their parents and have them explain how to mail a letter. 

Another example is public education. The U.S. is stuck with an old, industrial model of education for which children are enrolled according to their age, then moved down an assembly line with all of them reading the same material on the same day. There are periodic tests to maintain quality control. But the goal at the end of 12 years is to have produced a relatively homogeneous product that allows every child to start their adult life at the same point.  Then we send them to college for four years, where the government loans them money to take the courses they enjoy the most. When they graduate, they have a degree few employers value, so they are unable to find a job to pay back their government loan.  Meanwhile our industries must scour the globe to find people with the technical skills they need. 

After the pandemic, our schools may find that parents have discovered a viable option in remote leaning. Once consumers are empowered by choice, it is adapt or die.


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