The New Normal

Steve Stack | Truthdig

One of the most striking properties of the small water droplets through which COVID-19 propagates is the striking difference between the one and the many. While these little droplets can carry the virus to your lungs to begin its lengthy incubation period, they can’t be seen, nor can they be felt. Yet when accumulated, by the tens, the millions, the billions, these water droplets become something else - a body of water, which can douse you, or flood a city. The accumulation of water is more powerful than the individual, by orders of magnitude. Additionally, the plurality also has new properties that the individual does not, like wetness. In chemistry, when the accumulation of familiar substances forms a new chemical with entirely new properties, the phenomenon is called emergence. However, this is not only the case for substances like water: the social order is very much an emergent property of the accumulation of humans. What we are witnessing with COVID-19 is the loss of some of the emergent properties of human beings interacting and gathering - the breakdown of systems that keep us safe, warm, fed, and, just as importantly, well socialized.

From an economic perspective, this isolation seems like the definition of bad news, yet what we know about isolation and social distancing is fairly straightforward: it’s an exacerbation of several trends that had been happening for a long time. One of these is unbundling, quite simply the separation of two things, usually two processes. Economists recognize three waves of unbundling. The first wave came with industrialization and world trade, geographically unbundling production from consumption. What was the norm for most humans for most of history was eviscerated, and people began to consume imports rather than local goods. The second wave, spurred by the standardization of shipping containers, lowered the cost of transport to the point where extensive supply-chains (now ravaged under COVID) were the most economically sound option, decoupling the supply and demand for factors in the production of goods, with one key exception. The third wave is currently unbundling that key exception: the market for labour which underlies our other market models.

Geographically speaking, technology is unbundling labour from production. An acclaimed neurosurgeon in Brussels can operate on a critical patient in Melbourne using remotely controlled, extremely precise robotics, and specialized cameras. The best algebra teacher in Canada can tutor a student in China, while a Scottish English teacher loads up their Zoom connection to that same child.

This process is known as telecommuting, a common enabler of individuals working from home. And because of its cost savings for employers, telecommuting has become an economic revolution that COVID has illuminated. Yet this begs a question - if working from home is economically viable, why was it never the norm? The answer is likely twofold: managerial knowledge of its viability was limited, and there were high transition costs, especially administrative costs, posing a barrier to switching. COVID-19 has effectively diminished those transition costs going forward by forcing companies to bite the bullet now and do the administrative work of creating telecommuting systems, which is certainly better than not having employees. This is significant because it begs a question of whether a ‘return to normalcy’ via a return to the office is economically viable at many firms. With transition costs paid, and infrastructure set up, why go back at all? Of course, the main reason would be the diminished productivity of workers. To predict whether this will materialize, we can turn to economic literature like Bloom et. al from 2013. Here, a field experiment on a Chinese travel agency, Ctrip, demonstrated a 13% increase in productivity of workers who transitioned to working from home, as well as lower attrition and greater net employee satisfaction. This increased even further when employees were allowed to freely select between working from home and working in the office. The firm in the study immediately implemented working from home by selection for good, which may not only have been a profitable move but also a move that, in general, will shield companies from risk, were this to happen again. Yet, the selection also introduced a larger portion of the home-based workers returning to the office than would be expected based on the positive results of the study. The main reason, based on survey evidence, was loneliness.

This brings us to the heart of the matter: without free selection, we may increase the efficiency of our economy in the long run, but provide an economic incentive to exacerbate a not-often-enough discussed externality that was preying on developed societies before the lockdown: the loneliness crisis.

A recent study shows that nearly half of the US population feels like they experienced “a lack of social connections.” Loneliness is a public health emergency, and it has the potential to kill at a rate as high as smoking and obesity in an influential meta-study. These studies, of course, were pre-COVID. During COVID, we have already seen some of the worst comorbidities of loneliness materialize, with a recent spike of addiction and overdose deaths here in Vancouver. Nevertheless, this might be the biggest consideration in a post-COVID world - one where demand for labour is more unbundled from the supply of that labour than ever, and the easily-ignored externality of loneliness rears its head.

But let's shift focus from discussing the demand for labour to discussing the demand for everything else. There are two scenarios to consider. The first scenario would see the economy gleefully reopen to a largely vanquished COVID threat, either through vaccination or treatment or testing. Even in this best-case, demand does change. Demand, both in its modeling and in its inherent logic, is shaped by underlying preferences. These preferences are often shaped by factors like habits, familiarity, or convenience. Therefore, COVID-19 has likely caused many individuals to change their preferences. This can have unintended consequences on the present economic structure. For example, people may have bought extra entertainment for their homes, which, in turn, raises the opportunity cost of enjoying entertainment outside their houses. Furthermore, people may have purchased equipment to create a home gym and may no longer need to return to the gym when the economy re-opens. Families have also set up automatic online delivery of household staples, which is likely to drive the local grocer out of business. All these examples support an already happening trend, the shift from brick and mortar firms to online retailers.

Yet another place where changing preferences could have dastardly implications, is in a shift toward demand for gig-economy roles: consumers are now more likely to pay the local Uber-eats drivers than the local sushi place, forcing many to wonder whether restaurants will reopen. This trend has already begun to occur, with many restaurants operating ghost kitchens meant only for delivery. The implications of this shift are significant, as perhaps it can contribute to the further erosion of worker benefits, which are conspicuously absent in many gigs, a mechanism for increasing inequality. Nevertheless, this is obviously bad for businesses, whether local, franchised, or even fully corporate. It's one thing to weather a hit with generous loans to boot. It’s another entirely to experience a long-term loss of demand. This effect cannot be underestimated in this scenario, because it deals with timespans (months for treatments and adequate testing to upwards of a year and a half for a vaccine) which can easily form and reform habits.

Even worse, the effect if demand does roar back full-force may also be detrimental. Economists have speculated that we are facing a shock in both supply and demand, but supply has to worry about the distinction between short-run and long-run capabilities. Even if the demand exists, new companies can only replace those that left the market, and new employees can only be hired so quickly. This doesn’t even account for those that would leave the workforce entirely. This demand shock without supply catching up could lead to a nasty stagflation scenario, where things become more expensive even in a bad economy. This hurts the unemployed, especially because direct government liquidity transfers of a preset size might struggle to keep up with higher-than-expected inflation.

However, the second scenario is worse - a hasty re-opening. Here, we must bring into the picture the debate over reopening the economy. Re-opening large sectors of the economy without adequate containment measures may be the death knell as to whether the virus re-emerges in an even more prolific wave, possibly paired with the seasonal flu in an even greater test of our already scarce healthcare resources.

If that is the case, and the economy is forced to close again, investor confidence could be all but shattered until herd immunity emerges. Consider an economy attempting to re-open after having been forced to close twice or three times: this is not characteristic of an investor's paradise. For most assets, the risk is inherently higher than at the first re-opening attempt. This could optimistically look like an economy in recession for a year and a half to two years. Alternatively, if an opening occurs with proper containment infrastructure established, it may be possible to keep the morbidity at such a low level that careful economic function may be sustainable until such time as herd immunity is achieved. This could be accompanied by a steady or even significant recovery.

In either case, the 'New Normal' is not too different from an image of the ‘Old Normal’, but rather a reflection, a flashy expansion of trends which were already unfolding. It will be a lonelier, perhaps somewhat less prosperous normal for the everyday person. But it still beats a pandemic, and that’s reason enough to be hopeful.