The Unthinkable Became Reality—Now We Need Radical Solutions

(Bloomberg Markets) — Remember when all of this was unthinkable? More than 20 million out of work in the U.S. China seizing up. The oil market collapsing, entire industries—airlines, professional sports—shutting down.

It seems a calamity of this magnitude should have been a thing of the past. And yet here we are, confronting the reality that a virus 400 times smaller than the diameter of a human hair has exposed the weaknesses of our globalized economy with ruthless indifference. The crisis is a rupture between the world we knew and the one that’s coming.

The question now is, what will this new world look like?

For all of the initial hopes that things would snap back to normal with a V-shaped recovery once the Covid-19 disease was suppressed, it’s becoming more likely that a protracted, L-shaped path lies before us. Ben Bernanke, the former chairman of the Federal Reserve who managed its response to the 2008-09 crash, says the U.S. economy has little chance of truly rebounding until the virus is defeated and people feel safe enough to resume their life.

Yet he also says the swiftness and scale of Washington’s reaction to the economic crisis—the Fed and Congress are on course to deploy more than $6 trillion in support for businesses and households—should prevent it from unfolding like the Great Depression, a 10-year slog worsened by policy errors and inaction. “If we are patient and do what we should be doing, we will come out all right on the other side,” Bernanke said in a webcast conducted by the Brookings Institution in April.

Michael Mandel, chief economic strategist at the Progressive Policy Institute in Washington, says the flash flood of money will accelerate the drive by industries to invest in technology and automation to improve productivity. And manufacturers will be motivated to bring home operations long outsourced to China and other cheap-labor locales in a process he calls localization. Both of these developments should lead to an increase in wages and opportunities for workers, he says. Many of these shifts were already under way before calamity struck. One of the extraordinary effects playing out is a form of “accelerated history,” in the words of Richard Haass, president of the Council on Foreign Relations. We’re watching developments that normally take years to unfold do so in weeks.

But many of these trends will come at the expense of swaths of society ill-equipped to participate in a more sophisticated labor market that depends increasingly on software and automation, even in blue-collar jobs. “This is going to be a painful, nasty, tragic period, but I also see an opportunity for a boom in capital investment, digitalization, and entrepreneurialism,” Mandel says. “Now the benefits of technology-driven growth are going to be spread more widely, but some people will be left behind, and the need for a social safety net will become much more relevant.”

This is just one of the dynamics that will play out as investors and businesses look for stability and growth. The fear, of course, is that restoring a sense of normalcy won’t be possible. Too much time will have passed and too much damage will have been done. State interventions in the private sector, which make the bailouts of 2008-09 look quaint, are bound to shake up the political landscape for years to come. The prepandemic era may be unrecoverable.

Yet there’s a case to be made that that’s fine. It wasn’t as if the world was enjoying a period of blissful calm before the novel coronavirus struck. President Trump’s America with its nationalist populism; Britain and its Brexit; and Turkey, India, and other countries already had upended the world order set in motion after World War II. Anxiety about a chaotic future has been running high for some time.

The twin challenges of climate change and economic inequality were galvanizing the political energies of young people and refocusing the agendas of investors and corporate chieftains. Change was in the air. Amartya Sen, the Nobel Prize-winning economist and expert on inequality, is one of many influential voices calling on leaders to seize the moment and create a new social contract that finally addresses chronic imbalances such as the lack of affordable health care in the U.S.

Pandemics do have a way of forcing radical redistributions of wealth. The historian Walter Scheidel says that disease—along with war, revolution, and state collapse—is one of the “Four Horsemen” that have flattened inequality throughout history. After the plague killed more than a quarter of Europe’s population in the 14th century, real incomes in Amsterdam, London, and other cities doubled as surviving laborers and craftsmen commanded higher compensation, as well as meat and beer, for their work. In the meantime, income among the aristocracy fell, and numerous noble families, left without heirs or strategies for preserving their fortunes, disappeared, Scheidel argued in his 2017 book, The Great Leveler: Violence and the History of Inequality From the Stone Age to the Twenty-First Century.

Could such a moment be at hand again? Recent proposals to tax the superwealthy and adopt universal basic income for the masses were dismissed by many as nonstarters. Now such measures suddenly seem possible with a Republican president signing $1,200 checks for taxpayers and a Conservative British government covering 80% of the pay for millions of furloughed workers through at least July. Eventually, states are going to need windfalls of tax revenue simply to dent the astronomical debts incurred this year.

As terrible as Covid-19 is, it’s not going to be enough to force a fundamental reordering of our economic priorities, Scheidel says. He says inequality will actually worsen as workers lose jobs and, in the U.S., access to affordable health-care insurance. Although governments may prevent a prolonged depression, he says, their efforts will ultimately fortify the status quo the way they did after the 2008 crash. It may take successive waves of crises, including climate change, to upend a world where the richest 62 people own as much wealth as half the global population. “In the 14th century you had famines, plague, and then more plague,” says Scheidel, a history and classics professor at Stanford. “If you take a 50-year view, you could end up with enough dislocation to create change.”

Faiza Shaheen, an economist, says the time is long past due for improving the livelihood of workers who’ve found themselves on the front lines of the pandemic. A U.K. Labour Party activist who narrowly lost her bid for a seat in Parliament in December, Shaheen watched with astonishment as Boris Johnson’s Conservative government rushed through emergency measures that could have come right out of her own side’s playbook.

Now she fears the crisis will pass, leaving unresolved long-neglected problems such as the low wages paid to those who tend to the elderly in social-care homes. In the U.K. as in other countries, those facilities were hit hard by coronavirus infections, with 8,312 deaths recorded as of May 1 in England and Wales.

Shaheen says the failure to support social-care workers is one of the legacies of the policies of austerity and privatization that successive Conservative governments pursued in the decade following the crash of 2008. “There would have to be deep changes in Tory ideology to get lasting increases in public investment,” says Shaheen, director of the Centre for Labour and Social Studies in London. “We are going to have to shout really loud and build a social movement to see real change.”

Shareholder activist Catherine Howarth is making some noise herself. As the chief executive officer of ShareAction in London, she’s among those at the forefront of the environmental, social, and governance, or ESG, movement. Too many companies, Howarth says, use poorly paid employees, freelancers, and zero-hour contracts that don’t vest workers with the benefits and security of permanent employment—all problems that the pandemic has exacerbated.

So her not-for-profit, which has long put pressure on companies over climate change, is enlisting institutional investors to use their clout, and shareholder resolutions, to get boards to adopt more progressive employment policies. More than 40 listed companies in Britain have already committed to paying a “living wage,” which is 20% higher than the minimum wage, to employees and contractors. Given the growing influence of ESG funds—last year investors plowed more than $20 billion into these vehicles, four times more than in 2018—she’s hopeful more firms will get on board.

But Howarth really can’t say whether the crisis will be a catalyst for change. “I have no idea if this moment will dissipate or there will be enough imagination in companies and the investment community to design a new form of capitalism that protects people from these kinds of shocks,” she says. “But maybe we can build things back better than they were.”

Many of the certainties we took for granted in the global economy are now up in the air. Take China. The Progressive Policy Institute’s Mandel says the disruption of supply chains with the world’s second-biggest economy will have far-reaching repercussions. For so long, China filled the shelves of American big-box stores. The wondrous thing about this flow was that prices held firm year after year even as average wages in China quadrupled. The anomaly speaks volumes about how China vaulted hundreds of millions of its citizens out of poverty at the same time as America savored the fruits of a consumption-led boom.

Even if Trump’s trade dispute with China didn’t truly blow up this cycle, the coronavirus almost certainly will, Mandel says. That means the prices of Chinese goods will probably rise just as the Fed is flooding the economy with cash and Americans become more savings-minded. Mandel says inflation, that old bugbear that last bedeviled the U.S. economy in the early 1980s, could come roaring back.

But it may take a while. When the bottom fell out of the energy market in April and the price of oil slid below zero, it became clear that disinflationary risks would affect the global economy for some time to come. Iain Barnes, the head of portfolio management at Netwealth Investments Ltd. in London, says it’s hard to see exactly how demand for energy will rebound anytime soon.

Still, Ray Dalio goes so far as to say you’d have to be “crazy” to hold government bonds because central banks are willing to print money to save their economies, which will make their fixed-income obligations a poor storehouse of wealth. That’s a startling opinion given that the debt of the U.S. government and other highly rated states is considered the safest bet. Moreover, Dalio, the founder of Bridgewater Associates LP, the world’s biggest hedge fund, told Bloomberg News in April that the pandemic will usher in a “new world order” as leaders strive to fill what he calculates is a $20 trillion hole in the global economy. He says investors will even have to redefine “the value of money and credit.”

Bernanke also sees lasting shifts in our political economy. He’s been thinking about the principle of hysteresis, which in economics refers to the perception that what might at first be judged temporary eventually becomes permanent. He notes that economists have long been concerned about the rising concentration of big corporations across industries. That trend may intensify if the government cannot help smaller companies survive the crisis. Bernanke also said teleworking and doing business remotely had the potential to reshape consumer behavior and the economy.

Money manager Peter Fitzgerald has lived through a lifetime’s worth of crises, from the Asian financial meltdown of 1997 through the dot-com crash of 2000, to the bust of Enron and WorldCom in the early aughts, all the way through the subprime mortgage crackup in ’08 and then the European Union’s 2012-15 sovereign debt crunch. Through them all, he says, you could almost always see a solution.

No matter how intractable the problem seemed—remember that tug of war between Germany and Greece over a bailout five springs ago?—you could take solace because there was a fix, no matter how unpalatable it might be. “This time we just don’t have the data,” says Fitzgerald, chief investment officer for multiasset strategy at Aviva Investors Global Services Ltd. in London. “I have a feeling this is still just beginning.”

This loss of agency, of control, is what Fitzgerald and so many other seasoned finance pros find truly chilling. It’s the virus, not the Fed’s Open Market Committee or the EU’s Eurogroup, that’s calling the shots. Until our science gives us the upper hand, the best we can hope for is to hold the line.

Robinson covers wealth in London.


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