Some Ways the Pandemic Could Alter the Shape of the US Economy

Some Ways the Pandemic Could Alter the Shape of the US Economy

Timothy Taylor 21/07/2020 6
Some Ways the Pandemic Could Alter the Shape of the US Economy

It's clear that the COVID-19 pandemic has caused a recession.

But is the form of this particular recession also reshaping the US economy in other ways? The Hamilton Project at the Brookings Institution recently published a set of four papers on the subject "How COVID-19 is Reshaping the Future of Business and Work." Video of a one-hour discussion by some of the authors, along with links to the paper, is available here. 

The short overview paper by Wendy Edelberg and Jay Shambaugh points out that this recession is fundamentally different ("How the Pandemic Is Changing the Economy," July 2020).  

Recessions often result from an imbalance in the economy— for example, overinvestment in a sector, asset bubbles, or excessive leverage by businesses and households—and a rapid change in expectations about the future. ... The COVID-19 recession was precipitated by necessary collective action taken to preserve the lives of Americans and to buy time to put responsive public health measures in place; a partial shutdown of the economy resulted from decisions by federal, state, and local governments as well as decisions by businesses and households. The nature of the shutdown led to a much sharper contraction than during prior recessions but also—so far—to a shorter period during which the economy was contracting. The unemployment rate began to fall just two months after it initially rose, and job gains in May were the fastest on record (BLS 2020). Retail sales bounced up in May after a sharp downturn in April (U.S. Census Bureau 2020a). Still, the quick onset of the recovery has not meant a full rebound, and the resurgence of the virus in June and July may signal more ups and downs for the economy. Even if improvements in the labor market and spending continue to be significant, the U.S. economy will likely face a sharply elevated unemployment rate and sizable gap in output relative to precrisis levels for well over a year (Congressional Budget Office 2020).

What are some likely effects of this particular kind of recession? David Autor and Elisabeth Reynolds point out several of them in "The Nature of Work after the COVID Crisis:Too Few Low-Wage Jobs " (July 2020). One example is what they call "telepresence," which is meant to describe a wider phenomenon than just telecommuting

Autor and Reynolds trace the term "telepresence" to an essay a few years back about underwater drones. As they write: 

Placing people in any physically hostile environment—such as at the bottom of the sea, in Earth’s upper atmosphere, at a bomb disposal site—entails costly, energy-intensive, life-support systems that provide climate control (i.e., oxygen, temperature regulation, atmospheric pressure), water delivery, waste disposal, and so on. By obviating these needs, telepresence not only reduces costs but also typically creates better functionality: machines unencumbered by physically present operators can take on tasks that would be perilous with humans aboard. These same lessons apply to workplaces.

Though (most) work environments are not overtly hostile to human life, they are expensive, duplicative places for performing tasks that many employees could telepresently accomplish from elsewhere, albeit with a loss of the important social aspects of work that they facilitate. Not only is providing and maintaining physical offices costly for employers, but also the need to be physically present in offices imposes substantial indirect costs on the employee. The Census Bureau estimates that U.S. workers spends on average of 27 minutes commuting to work one way, which cumulates to 225 hours per year (U.S. Census Bureau 2019; authors’ calculations). Arguably, many of us who perform “knowledge work” have been so accustomed to the habit of “being there” that we failed to notice the rapid improvements in the next best alternative: not being there.

Telepresence is not just a matter of commuting to previous job locations, of course. It also involves business travel, and rebalances the question of when it's worth a personal trip and when telepresence will suffice. It involves how telepresence may substitute for in-person visits in health care, education, retail shopping, perhaps even in areas like guidance for doing your own small repairs around the home. It involves shifts in the travel, hospitality, and entertainment businesses. Once these possibilities are discovered and explored, they will not just vanish from memory as the economy recovers. 

Autor and Reynolds also point to prospects for "urban de-densification": 

The past three decades have witnessed an urban renaissance. U.S. cities have seen steep reductions in crime, significant gains in racial and ethnic diversity, outsized increases in educational attainment, and a reversal of the tide of suburbanization that drew young, upwardly mobile families out of cities in earlier decades (Autor 2019; Autor and Fournier 2019; Berry and Glaeser 2005; Diamond 2016; Glaeser 2020). It seems plausible, though far from certain, that the postpandemic economy will see a partial reversal of these trends. If financiers, consultants, product designers, researchers, marketing executives, and corporate heads conclude that it is no longer necessary to commute daily to crowded downtown offices, and moreover, if business travelers find that they need to appear at these locations less frequently, this may spur a decline of the economic centrality, and even the cultural vitality, of cities.

Cities have needed to redefine and reinvent themselves repeatedly over the decades and centuries. In the aftermath of the pandemic, they may need to do it again. 

Autor and Reynolds also point to "automation forcing," which is just the idea that in case you were already worried about automation and labor markets, now there is additional economic pressure to substitute machines for people. They write: 

Spurred by social distancing requirements and stay-at-home orders that generated a severe temporary labor shortage, firms have discovered new ways to harness emerging technologies to accomplish their core tasks with less human labor—fewer workers per store, fewer security guards and more cameras, more automation in warehouses, and more machinery applied to nightly scrubbing of workplaces. In June of 2020, for example, the MIT Computer Science and Artificial Intelligence Lab launched a fleet of warehouse disinfecting robots to reduce COVID risk at Boston area food banks (Gordon 2020). Throughout the world, firms and governments have deployed aerial drones to deliver medical supplies, monitor social distancing in crowds, and scan pedestrians for potential fever (Williams 2020). In the meatpacking industry, where the novel coronavirus has sickened thousands of workers, the COVID crisis will speed the adoption of robotic automation (Motlteni 2020). Surely, there are myriad other examples that are not yet widely known but will ultimately prove important. ... As the danger of infection recedes and millions of displaced workers seek reemployment ... [f]irms will not, however, entirely unlearn the labor-saving methods that they have recently developed. We can expect leaner staffing in retail stores, restaurants, auto dealerships, and meat-packing facilities, among many other places.

Yet another shift is that the business sector is seeing a wave of bankruptcies, which may lead to some monthly rates as bad as the depths of the Great Recession. On the other side, business start-up rates were already on a downward trend in the US economy. With more firms going broke and fewer start-ups, the economic stage seems set for large firms to play a bigger role. Moreover, some months down the road if and when the public health trends become more clear, a number of weakened firms will want to seek out partners for mergers as they try to reconstitute their strength. Nancy L. Rose discusses these issues in  "Will Competition Be Another COVID-19 Casualty?" (July 2020). She writes: 

In the tech sector, responses to COVID-19 produced strong positive demand shocks for many firms engaged with the digital economy, as work, school, shopping, entertainment, and other traditionally in-person interactions all moved online (Koeze and Popper 2020). Social media sites saw increases in usage, and online video and streaming services reported record growth in demand, likely reflecting a combination of new users and more-intensive engagement by preexisting users. This has tended to reinforce the preexisting advantages of the largest firms, which often had the systems, logistics, and capacity to better accommodate the surge in demand associated with the shift online. This impact is likely to reinforce their dominant position not only during COVID-19 shutdowns, but also extending into the future. As many households tried online grocery shopping for the first time, for example, their experiences may keep them as regular online grocery shoppers even when the economy reopens, exacerbating the shift from brick-and-mortar retail to online shopping, and to the largest online grocers, including Amazon’s subsidiary, Whole Foods. If this reinforces the network advantages of these large platforms, it may become even more difficult for competitors to gain a toehold. As competition diminishes, consumers, workers, and suppliers all stand to lose.

These economic shifts will not affect all groups equally. The in-person service industries that are some of the hardest-hit in this recession are also industries that hired relatively large numbers of low-skilled workers and also women worker. Women who are parents are also experiencing a double-whammy in the recession, because they are more likely to bear the larger share of child-care responsibilities at a time when schools and child-care facilities are shut downBetsey Stevenson discusses this issue in "The Initial Impact of COVID-19 on Labor MarketOutcomes Across Groups and thePotential for Permanent Scarring" (July 2020)

The pandemic has also hit women harder than men by the increased burden of care since children’s schools, daycare providers, and camps have closed, and many remain closed. Additionally, many families have had to consider how to best provide elder care and how to ensure the safety of those more vulnerable to the worst effects of COVID. Women’s traditional caregiving role and the crisis of care that many families are facing in the United States could have long-term repercussions for women’s labor force attachment and success, although we have yet to see this impact in the data. ... 

While Congress has scrambled to save airlines on the belief that air travel is essential for a well-functioning modern economy, they have overlooked what is perhaps the most important industry in a modern economy: our child-care providers and schools. Parents will continue to struggle with child-care issues, particularly with the potential of children out of school and without child care this coming fall and the risk to grandparents of relying on them for child care. The pandemic has highlighted the fact that child care is not a women’s issue, it is not a personal issue, it is an economic issue; parents cannot fully return to work until they are able to ensure that their children can safely return to child-care and educational arrangements. The child-care crisis spurred by the pandemic could force families to make difficult decisions that will lead to lower labor force participation and lower earnings for decades to come. The solution to preventing large-scale permanent scarring, particularly among women, is to prioritize safely opening schools, to ensure that child-care centers do not go bankrupt and that the centers have the resources to adapt their buildings and practices to new protocols like improved air flow and increased surface disinfecting, and to encourage workplace flexibility.

My youngest child graduated from 12th grade earlier this year, so I no longer have a child in the K-12 system. But I'll point out in passing that several nonpartisan organizations and reports have argued that for the good of the children, and with appropriate precautions in place,  K-12 schools should be reopened this fall. For example, here's a short statement from the the American Academic of Pediatrics (June 25, 2020) and here's a more detailed report from theNational Academy of Sciences on Reopening K-12 Schools During the COVID-19 Pandemic: Prioritizing Health, Equity, and Communities

A version of this article first appeared on Conversable Economist

 

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  • Eric Watson

    This pandemics has sparked societal changes like income tax, increased security measures and outdoor spaces.

  • Dominic Walker

    Amazing analysis

  • Pete Atkinson

    Lockdown has killed the economy

  • Dan Hunter

    WHO seems to enjoy this pandemic a little too much. Weird and scary organization.

  • Jay Roberts

    China had a high infection rate but they did a tremendous job in controlling the fatality. They are probably hiding data, but they are at least wearing masks.

  • Mark Gutteridge

    Remote work and digitisation have increased

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

   

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