More Thoughts on the Post-Pandemic Economy

July 29, 2020

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.  


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