There have been a spate of articles put out in recent weeks about how the coronavirus pandemic will or will not change the world going forward. Various experts have weighed in with their opinions, ranging from a rapid shift in world order from West to East to acceleration of pre-existing trends to no lasting change at all.
In what follows, I’ll sketch out the opinions of a swathe of experts, focusing on a few important points, and finish with a conclusion about some investment implications.
Let me start with a point of my own. Academics and writers have continuously mislabeled (whether out of sloppiness or intentional deceit) the United States as a bastion of free market capitalism and small government thinking. Even President Trump is sometimes cast as a free marketeer, despite his numerous moves to expand the role of the state in the US economy and his quasi-mercantilist inclinations. Not to mention the widening of the fiscal deficit that has occurred on his watch, even before the arrival of the coronavirus pandemic.
I think the pandemic will be yet another step away from the small government capitalism of yore toward an ever more state-managed, -guided, and -protected form of capitalism. This may sound like the ideology already espoused by Democrats, but there will be a Republican form of it as well. The party that wholeheartedly embraced the Tea Party movement a decade ago has now largely shifted toward economic nationalism. Adam Smithian rhetoric has mostly disappeared from mainstream conversation, and trillion+ fiscal deficits (already acceptable to both sides before the pandemic) are a foregone conclusion.
The experts opinions vary considerably from my own.
Henry Kissinger writes in a Wall Street Journal opinion piece that the US government needs to manifest a more robust and farsighted role in society and the world more broadly in order to protect its populace and ensure its place in a new epoch. In a Foreign Policy piece, Nicholas Mulder highlights the way in which nations around the world have gone into wartime mindsets to fight the pandemic, both to control their populations and to mobilize resources and production. He connects the steps being taken today, such as enacting the Defense Production Act and instinctively using debt-financed federal spending to support the embattled citizenry, with those taken during the two world wars of the twentieth century.
The similarities are remarkable. And the effects of going into a wartime footing, says Mulder, are often long-lasting or even permanent. Policies that were pitched as temporary and ad hoc become entrenched. Cultural and political changes crystalize rather than fade as normalcy returns. “Governments of all types will adopt emergency measures to manage the crisis, and many will be loath to relinquish these new powers when the crisis is over,” says Stephen Walt of the John F. Kennedy School of Government at Harvard.
Many experts see multiple ways in which COVID-19 will materially and permanently alter the landscape of government and the economy. “Fundamentally there are going to be huge changes in household consumption patterns, business patterns and global supply chains,” says former Fed governor Kevin Warsh.
Torsten Slok of Deutsche Bank Securities believes that consumers will prioritize saving rather than spending going forward, much as they did during the Great Depression. This could be driven, in large part, due to the sudden lack of jobs millions are currently experiencing. I would add that this event, like the Great Recession, will likely cause a permanent dampening effect on the labor force participation rate as more individuals become reliant on welfare or family members rather than return to work.
Stephen Walt sees a world less open, prosperous, and free. The pandemic will pour fuel on the fire of nationalism, and there is widespread agreement that economic globalization will see further declines because of it as well. Although some experts believe the decline won’t be of globalization in general so much as US-centric globalization.
Richard Haass argues in Foreign Affairs that “COVID-19 will not so much change the basic direction of world history as accelerate it.” He asserts, instead, that the post-pandemic world will be a recognizable, if supercharged, version of what preceded it.
Waning American leadership, faltering global cooperation, great-power discord: all of these characterized the international environment before the appearance of COVID-19, and the pandemic has brought them into sharper-than-ever relief. They are likely to be even more prominent features of the world that follows.
While Robert Kaplan of the Eurasia Group sees a reinvigoration of globalization and international cooperation, Haass views the world as lamentably disunited and likely to grow increasingly so as central power vacuums are filled by national capitals. Similarly, writing in the World Politics Review, Judah Grunstein swats down the idea of China emerging from the pandemic as a new global leader, citing faulty medical equipment coming out of China and the continued national competition for scarce medical supplies.
What does all this mean for American and global corporations? Shannon K. O’Neil of the Council on Foreign Relations thinks advanced country companies will see lower profitability as supply lines are moved from the lowest cost international providers to higher cost domestic providers. Laurie Garrett also thinks companies are likely to be more reticent to rely on the just-in-time shipping model in which goods cross multiple borders in a matter of days in order to arrive at their destination precisely when needed.
On the other hand, such a move could also spur a lurch forward in robotics, automation, and 3D printing as manufacturers minimize labor costs. What’s more, “strategic industries” will be prompted by governments to establish more domestic supply lines and will be treated a little more as quasi-public entities. “Profitability will fall,” writes O’Neil, “but supply stability should rise.”
To the extent that economic interdependence pulls back, publicly traded companies that either sell their goods or source their materials from foreign countries should suffer. And this will hurt far more than just shareholders. It will trickle down to workers and consumers. “We are headed for a poorer, meaner, and smaller world,” says Shivshankar Menon.
Common among almost all commentary about how COVID-19 will change the world is criticism of the weak, inadequate global and federal leadership in handling this cross-border crisis. The US has abdicated its role as leader and organizer of nations. And the federal government, commenters broadly agree, has done a pitiful job of seizing control and doing what’s necessary to protect the citizenry (federalism be damned!).
“Power is distributed in more hands, both state and nonstate, than ever before,” laments Haass. “Consensus is mostly absent. New technologies and challenges have outpaced the collective ability to contend with them.”
Despite the prior consensus that China’s authoritarian measures to control its populace (such as the use of facial recognition cameras and social credit scores) are overbearing and unacceptable invasions of privacy, there seems to be a sudden admiration for Chinese-style centralization of power. Few Westerners look favorably on China’s population control measures, but many want their own governments to wield that kind of power to provide safety in times of crisis. (Though what exactly could be considered a “crisis” is up for debate.) Why, for instance, couldn’t the federal government have simply declared a strict lockdown at the first sign of community spread like China did?
This desire for centralization is plain to see in economic and monetary matters. During the Great Recession, there was very little Republican support for multi-trillion dollar economic stimulus spending by the federal government. In the present crisis, the majority of Republicans have scrambled over each other to support such spending. Is the difference between then and now about the cause of the crisis? Or who occupies the White House? Undoubtedly, both play a part.
Mulder, writing in Foreign Policy, believes that the nation has shifted into a wartime mindset, and as such the old ways of thinking no longer apply. He compares our situation today with that faced by the citizenry in the two world wars. A prevailing theme in those times was the sacrifice of self-interest and business interest in favor of the common good.
As millions volunteered to fight while civilians on “the homefront” manned factories, schools, and hospitals, states were able to create a new moral economy. Its central object of contempt was the figure of the war profiteer. Every society at war between 1914 and 1945 reserved a special hatred for individuals who reaped massive profits while others risked their lives and offered their labor…. Wisconsin Sen. Robert La Follette denounced war profiteers as “the enemies of democracy in the homeland.”
This led to the implementation during and after both world wars of an excess profits tax. By 1943, businesses were charged a 95% tax on any profit above an 8% return on capital. And these anti-profiteering policies extended further than just the industries producing needed wartime goods. It applied also, for instance, to landlords, marking a permanent shift away from laissez faire thinking in housing policy. “World War I did more than anything in the 20th century to make rent control a widespread practice in capitalist democracies.”
Today, we find state authorities denouncing businesses doing anything they can to survive if those actions do not serve the common — national — good. Take President Trump’s spat with 3M (MMM), for instance. The President argued that 3M’s exportation of medical supplies to other countries was an unpatriotic betrayal of America. In reply, 3M argued that if the President forbade them from exporting their products to foreign countries, those foreign countries could turn around and do the same to us. The conflict just goes to show that Trump views himself as a “wartime president,” and the nation as being on a wartime footing, that made formerly acceptable behavior by 3M unacceptable according to this mindset.
Will other measures like restrictions on evictions and rent relief for economically vulnerable tenants turn into more permanent policies in some states? It certainly seems plausible.
And the declaration of a wartime footing by politicians for non-war crises seems likely to happen again for other issues. Eventually, if a wave of progressive politicians sweep into power, this “wartime economics” way of thinking could be applied to the issue of climate change.
Beyond economics, Haass sees a broader shift away from individualism and democracy:
The pandemic is likely to reinforce the democratic recession that has been evident for the past 15 years. There will be calls for a larger government role in society, be it to constrain movement of populations or provide economic help. Civil liberties will be treated by many as a casualty of war, a luxury that cannot be afforded in a crisis.
In what other kinds of crises will civil liberties and economic freedoms be deemed unaffordable luxuries?
The Temporary Becomes Permanent
Mulder recalls WWII and the way in which its aftermath shaped Europe permanently:
In the case of the European welfare state, the real fruits of wartime crisis management were only reaped after the end of conflict. Policies meant to deal with the damage of the Great Depression and the world wars created new constituencies. Despite being framed as exceptional wartime or postwar measures, many provisions rapidly became entrenched.
In other words, the reason that Europe embraced a more mixed economy and robust welfare system than the US is not simply that Americans tended to favor an Adam Smithian philosophy more than Europeans. It also had to do with the unequal devastation of World War II. After the armistice, European nations felt the need to stimulate their hollowed-out economies back to health, while the US felt the need to deleverage and return people and resources to the vigorous private sector.
In Europe, governments felt the had to do something to rehabilitate impoverished peoples with few opportunities. But in the US, businesses, factories, and infrastructure were still operational. Newfound demand from the mass return of soldiers mitigated the removal of wartime government spending. Factories simply switched back to making commercial or consumer products, rather than military ones.
In Europe, constituencies formed to extend (indefinitely) the temporary welfare benefits. But this happened also in the US, which made employer-provided health insurance tax deductible during the war as consolation for wage controls. That “temporary” measure remains in place today and has played a large role in shaping the American healthcare system over time.
Short-lived emergencies can temporarily bracket distributional questions from political debate, for instance over wages. But the longer warlike exceptions last, the greater the opportunities for subordinate groups to leverage their power. In the early 20th century, war production made labor unions more powerful in Britain, France, Germany, Italy, Japan, the United States, and elsewhere. Even when organized labor negotiated pacts of national unity with government and business interests, it put its power on display in the immediate postwar periods of 1918-1921 and 1945-1948, which witnessed the largest strike waves of the 20th century.
Will labor unions see a resurgence following the pandemic? What other temporary measures will become permanent?
Zero Interest Rates; Skyrocketing Debt; De Facto MMT
I’ve written elsewhere, multiple times, that central banks’ prescription for saving economies that have become too reliant on debt is lower interest rates, which naturally leads to even more debt buildup and sows the seeds of the next economic crisis. The current crisis is not diverging from that pattern. Richard Haass writes that
public and private debt in much of the world was already at unprecedented levels, and the need for government spending to cover health-care costs and support the unemployed will cause debt to skyrocket. The developing world in particular will face enormous requirements it cannot meet, and it remains to be seen whether developed countries will be willing to provide help given demands at home.
The United States, issuer of the world’s reserve currency, has effectively begun a new, de facto Modern Monetary Theory regime in which the Federal Reserve purchases most of the Treasury debt issuance. Modern Monetary Theory (“MMT”) is the economic theory that urges governments that issue debt in their own currency to take full advantage of the fiat system and print as much money as is necessary for desired federal spending, so long as it doesn’t cause a spike of inflation.
This is perhaps the biggest and least discussed shift caused by the pandemic. Before COVID-19, advanced economies were already engaged in a quasi-MMT experiment, with their central banks purchasing some but not most of their respective governments’ debt issuance. Now, multiple central banks are gobbling up virtually all new national debt, and then adding in some MBS, municipal, and corporate debt on top of that.
In my April 2019 article on Modern Monetary Theory, I discussed some of the differences between rosy claims made by MMTers and reality. It actually is possible to default on debt issued in one’s own currency when the only alternative is hyperinflation. Japan, which has been engaged in a quasi-MMT experiment for decades, has not shown any increase in unemployment, productivity, or economic growth because of it. And, of course, it is possible for the US to so overburden itself with unproductive government spending that we eventually lose USD hegemony in the world.
Is continued sluggish economic and productivity growth, leading eventually to a toppling of the US dollar as the world’s reserve currency, inevitable for the US under our new MMT-in-all-but-name regime? I would say it’s probable. At some point, the USD will fall out of favor as the international business currency just as the British sterling, and before it the Dutch guilder, did. What will replace it? I don’t know, but if I had to guess I’d say it will be a combination of currencies. Perhaps the euro and the yuan will become as widely used as the USD for international transactions and denominated debt.
When that day comes, the profligate and unproductive deficit spending of the US will come to an end.
Worsening U.S.-China Relations
Just observing how China and the United States have behaved toward each other around the COVID-19 pandemic makes clear the underlying hostility between the two nations. The US, naturally, is upset with China for concealing data about the spread of the virus within their own borders as well as for allowing it to escape into ours. Meanwhile, China accuses the US of having brought the virus to their shores from military soldiers and boasts of its more effective containment measures.
This comes in the wake of already prickly relations after a prolonged trade war that has only achieved a preliminary, phase one ceasefire agreement.
It’s easy to forecast continued withdrawal from one another, even as both nations have historically benefited from trade with each other. Again, Haass:
The impetus to decouple will grow as a result of the pandemic, and only in part because of concerns about China. There will be renewed focus on the potential for interruption of supply chains along with a desire to stimulate domestic manufacturing.
Beyond the current US president’s desire to return manufacturing jobs to the States, national safety will be evoked as a reason for withdrawing from China. The fragility of extensive supply lines that stretch overseas has been laid bare during this crisis. It could very well be used as a justification for protectionism long after it becomes rational and efficient to restore the old supply lines.
Not all is doom and gloom, of course. Even in the midst of changes that will make the world less prosperous, some players will emerge as winners.
Medicare’s decision to cover bills for telemedicine, for instance, was long overdue and should act as a boon to Teladoc Health (TDOC). And the newfound discovery of many workers that much of their work can be accomplished at home should lead to a marginally higher number of days working from home. This should benefit cloud-based office platforms such as that offered by Microsoft (MSFT), video chat programs like those offered by Zoom (ZM), and messaging software like that offered by Slack Technologies (WORK).
The move toward more of life and commerce via the internet should, of course, benefit Amazon (AMZN), but perhaps also smaller e-tailers like Wayfair (W) and Overstock (OSTK). And greater reliance on logistical networks, warehouses, and distribution centers should benefit logistics REITs such as Prologis (PLD) and Monmouth Real Estate (MNR). Moreover, a work-from-home trend should accelerate the rollout of 5G technology brought to us by telecommunications giants like Verizon (VZ) and AT&T (T), who rely on the cell towers owned by American Tower (REIT)”>AMT) and Crown Castle (CCI). And any increase in online activity creates data that has to be stored somewhere, thus increasing the need for data center REITs like Equinix (EQIX), Digital Realty (DLR), CoreSite Realty (COR), and CyrusOne (CONE).
And then, of course, there are the US manufacturers that already do most of their production and material sourcing in the United States, or can switch to domestic operations easily. Technology, on the other hand, does not rely on physical supply lines to the same degree as manufactured goods and thus could also come out of this pandemic even more of a winner than before. American technology leads the world in innovation, and I would expect that to continue.
In terms of the broader economy, though, I’m not very optimistic. That isn’t to say I expect a massive, wealth-destroying crash that will provide the economic reset that many have been expecting from our increasingly debt-based system. A black swan event (like a pandemic!) could cause such a crash, but to my mind a debt-fueled crash seems much less likely when central banks are buying public and private debt en masse. What if there is a massive downgrade from BBB-rated corporate credit into junk bond status? Well, so what? The Fed is buying junk bonds now, too. What if municipalities are unable to roll over their debt? You guessed it. The Fed is buying municipal bonds as well.
It may prove to be the case that central banks can print their way out of a debt-fueled crash. But that doesn’t mean there won’t be consequences. The multi-decade trend in unproductive debt buildup, rising consumer indebtedness, risky yield chasing, zombie company proliferation, leveraged buyouts, M&A-stoked industry concentration, exploding stock buybacks, pension underfunding, expanding wealth inequality, and other economic distortions will continue. As a result, the recovery coming out of the current recession will be even slower than that following the Great Recession.
It may sound like a troubling time to invest, but for now the US is still the cleanest shirt in the dirty laundry basket. So I will continue to hunt for opportunities and write about them here on Seeking Alpha.
Disclosure: I am/we are long CCI, DLR, CONE, MNR, T, VZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.