I think it’s highly likely that the dust will clear eventually and that our economy will come back to life at some point in the next two or three years. I know there are certain disaster scenarios that can’t be ruled out, but I think they are unlikely. I’m not going to guess when things will return to a semblance of normal. Really, no one knows.
The question for now is: what will that economy look like?
By some measures, in the short term, COVID-19 will surely reduce inequality of wealth, and probably inequality of income as well. As a purely mechanical matter, the rich have a lot more money to lose when the stock market crashes and most sectors of the economy grind to a halt.
At the same time, however, this pandemic is throwing into stark relief how unequal the lives of Americans are today. Most of the upper-middle class and rich seem to fall into one of two categories. Those without children in the house trade suggestions on how to fill their time: virtual happy hours, virtual yoga, free streaming opera, binge TV-watching, etc. Those with children in the house trade suggestions on how to keep said children occupied so that we can get anything done or have any time to ourselves: educational apps and websites, home science experiments, live streaming from zoos and aquariums, etc.
There are exceptions, of course. Doctors generally make comfortable livings, and many of them are currently facing difficult working conditions and high risk of infection to save as many lives as possible. But the most difficult thing many rich people have to endure is figuring out how to get a Peapod or Instacart delivery slot, or finding a good recipe for canned tuna.
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
—Adam Smith, The Wealth of Nations
This is the most famous line from the most famous justification of market capitalism. Smith’s point is that it is individual self-interest that drives the economy. In the next paragraph, he goes on to describe how gains from trade explain the division of labor in a modern economy:
“The certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.”
As I’ve said before, “whenever the butcher, the brewer, the baker, or the invisible hand is invoked, the reader should hear alarm bells going off.” The COVID-19 pandemic provides a particularly stark demonstration of the problems with Smith’s comforting fable and how it is used in contemporary politics.
It seems that social distancing is the primary strategy for slowing the propagation rate of COVID-19. That and widespread testing are the key tools for containing an outbreak, for reasons discussed repeatedly in the media.
But does it work? Or, more to the point, how well do different degrees of social distancing work? How strict does it need to be, and how tightly does it need to be enforced? It seems to me that this is an important and at least theoretically answerable question.
Thanks to ubiquitous commercial and government surveillance, there are staggeringly comprehensive databases of exactly where people are at all times. Google has one, for example. Picture for yourself an enormous aerial picture of some metropolitan area with a dot for every person’s location; then picture those dots moving around as time passes. That’s more or less what is available. (Some people are blocking their location data, and some people don’t have personal surveillance devices smart phones. But there are certainly enough people transmitting their location to do the analysis discussed below.)
The airline industry is trying to hold up the federal government for $29 billion in grants and another $29 billion in loans. They threaten that if they don’t get the grants they will lay off employees, and that if they don’t get the loans they will use their remaining cash on dividends and stock buybacks.
First of all, the second threat is staggering in its audacity. At current course and speed, the airlines will go bankrupt. When you are in financial distress, the last thing you should do is take your scarce cash and hand it to your shareholders. That meets at least the spirit, and perhaps the letter, of a fraudulent conveyance in bankruptcy law. But it represents the pinnacle of the idea of shareholder capitalism: screw the workers, screw the creditors, just take the money and run.
More importantly: the federal government should not give the airline industry a single penny either in grant aid or in sweetheart loans. I understand the economic challenges here. Thousands of workers are at risk of losing their jobs and not being to pay for food or rent in the midst of the greatest crisis of our lifetimes. To the extent we want to help them, the top priority is to give money directly to them.
Our business and household sectors are losing lots of money every day, and will continue to lose money for the foreseeable future. People no longer spend money at restaurants. Restaurant owners can no longer pay the rent or pay back their business loans. Restaurants fire their workers, who lose their paychecks and can no longer pay their rent, or their credit card bills, or their student debt. In an economic crisis like this, the overriding question is: who ultimately bears the losses?
We’ve been through this before. In the 2008 financial crisis, we applied the usual rules of capitalism—unless you were a large bank. Businesses failed and their owners (including shareholders, for corporations) were wiped out. Renters were evicted. Homeowners lost their houses. Investment funds that had bought mortgage-backed securities and collateralized debt obligations lost their money. Workers lost their pensions. Small banks were shut down by the FDIC. Big banks, however, got unlimited cheap credit from the Federal Reserve to stay afloat, thanks the the people we all know.
PPE, as we now know, stands for Personal Protective Equipment, like face masks and gloves. Right now there isn’t enough of it, and that’s one of the constraints on being able to test people, which is one of the biggest problems we face.
The only point I want me make here is this: This is how capitalism is supposed to work. If you’re a for-profit healthcare provider—or any kind of provider that is trying to provide the most value, however defined, with limited resources— you are not going to stock up on enough PPE to handle every possible scenario you might face. This is what management consultants and business school professors have been saying for decades. PPE, like inventory, is a form of working capital. If you can reduce the amount of working capital you need, you can translate that dollar-for-dollar into cash for your shareholders—or, if you’re a non-profit, into clinics for poor people, salaries for your executives, or that next gorgeous building you’re going to put up. Excess working capital is pure inefficiency.