Possible Fragments of the Post-Covid World Order, according to The Economist

October 13, 2020

     By Duncan Green     

This week’s Economist Special Report on the World Economy is a thought-provoking and beautifully written helicopter overview of the current meltdown. Some extracts:

‘Conditions before the pandemic were forged by the three biggest economic shocks of the 21st century: the integration of China into the world trading system, the financial crisis and the rise of the digital economy. As Chinese workers left rural poverty for factories, cheap goods flowed west and financial assets flowed east, helping to create low inflation, low interest rates and lost rich-world manufacturing jobs. The financial crisis caused a collapse in demand that further depressed interest rates even as globalisation stalled. The rise of technology contributed to a decline in competition, bumper corporate profits and a fall in the share of national income flowing to workers as superstar firms reaped the rewards of network effects and natural monopolies.

The covid-19 pandemic is a fourth big shock. The collapse in demand greatly exceeds that after the financial crisis. Saving may be elevated for years. Low and even negative interest rates are more likely to last. This will prop up asset prices even as economies are weak. Firms are more aware of the risks of supply chains that are both sprawling and fragile; covid-19 will increase the desire to bring them closer to home, and to diversify suppliers. And the pandemic is hastening digitisation. Consumers’ switch from physical retail towards e-commerce has quickened, and they have got used to getting some health-care and education services online.

The pandemic will mark a turning-point in politics and geopolitics as well as economics. The world will emerge from 2020 into an era of more intense great-power competition. The spread of covid-19 has coincided with, and to an extent exacerbated, escalating tensions between China and America. They have got worse than even the most hawkish observer predicted a few years ago. Trade disputes, with their strange focus on trade deficits and soyabean purchases, are now part of a broader battle. America has lobbied the world to reject Chinese 5G technology, ramped up scrutiny of foreign investors, imposed sanctions to restrict Chinese access to its semiconductor technology and is forcing TikTok, China’s most successful consumer-technology export, to sell itself. Chinese investment in America has collapsed. Both countries are diversifying away from each other in trade. The two economies are too integrated to decouple entirely, but they now combine far-reaching economic ties with pervasive mutual suspicion.

For domestic politics in the rich world, the pandemic represents a challenge to the status quo. Unlike the financial crisis, this is not Wall Street’s fault. But the juxtaposition of a weak economy with high asset prices that result from low interest rates could provoke public anger, especially if it coincides with unemployment concentrated among poorly paid service-sector workers. Low interest rates will make possible substantial prolonged deficit spending. How recessions are fought will change, partly because near-zero interest rates neuter monetary policy, but also because of this year’s experiments with large-scale cash transfers to households. There will be both the appetite and the conditions to facilitate a rewriting of the social contract in ways that many hoped might follow globalisation and the financial crisis. The question will be whether today’s politics is up to the job; or whether it is doomed to channel dissatisfaction with change into another round of backward-looking populism.’

Plus some striking ‘killer facts’:

‘two-thirds of American GDP in May was produced from peoples’ houses, a shift in production techniques unmatched in peacetime.’       

‘The shift in favour of remote work also looks curiously like an anglosphere phenomenon; workers in mainland Europe have been swifter to return to the office than those in Britain and America.’

And some telling graphics. First to illustrate the point on Anglosaxon v European preferences:

Employee preferences about working from home

Or this depiction of how wage inequality in the US has grown because of the pandemic.

Employment rate by salary

And some surprising long-term rethinking going on in what was previously a very state-sceptic magazine (italics mine);

‘Governments should be more willing to act as insurer-of-last-resort for household incomes, as they have this year. Emergency support for households has borne out the libertarian mantra that governments are better at moving money around than at running things. Income support has been quicker, more transparent and less vulnerable to capture than other forms of fiscal stimulus. Governments should be readier to shield workers’ incomes from events beyond their control. Lockdowns fall into this category, but so do recessions and technological disruption. Automating payments to households during downturns would prevent suffering and guarantee that economies get the stimulus they need when interest rates are stuck near zero. Structural change also counts: those laid off should be supported with grants and retraining subsidies. It is right to worry about encouraging joblessness, but the solution does not have to be a stingy safety net. Better to raise taxes to finance an adequate welfare state than to lay poverty traps and distort incentives with poorly designed eligibility tests.

Carry on like this, and I may be able to stop seeing reading the Economist as some kind of guilty pleasure…..

October 13, 2020
Duncan Green