Two friends recently asked me about how this “recession” would compare to the Great Recession. Prior to my retirement, I worked on Wall Street for twenty years, in various capacities — as investment banker, quant, trader and risk manager. Perhaps this is a good occasion to wear my old hat and do some economic thinking. The comparison of our current economic crisis to previous ones is certainly interesting topic. It is also worthwhile to ponder what the economy will be like when the dust settles.
I expect this Coronavirus-driven crisis to be worse than previous ones. The Great Recession of 2008 and the Great Depression of 1929 were financial in nature. They originated from a crash in the financial market. This one is not — it is natural and biological in nature. As such, it will have much more impact on Main Street than on Wall Street, quite the opposite of the earlier recessions. During the Great Recession of 2008, for example, the small businesses suffered but were not decimated. Even thought many big banks went belly up, many corporate offices stayed open. People are still eating out at restaurants and going to theaters and sports events. Also, many financial institutions were bailed out by the government. Even if a financial institution was not bailed out, the Chapter 11 protection means that the business could reorganize and re-emerge in another form and another name. The Coronavirus meltdown is different. It empties cities and grinds street traffic and travel to a halt. The ones hurt the most today are the smaller businesses and workers in the service sector — those who depend on foot traffic for their livelihood. Financial institutions can merge or be bought out and come back in another form. But when a small restaurant goes out of business due to lack of customers, how likely will it come back? There is much less resilience in small businesses and in the low-wage service sector.
Now, let’s consider the situation from an individual’s perspective. Unlike big corporations, individual workers typically don’t get bailed out by the government. Further, the middle class has hollowed out in the last two decades. Our recent society is bifurcated into the rich and the poor. Only a very small percentage of the population is well-off and comfortable. Recent surveys (Forbes 2016) found that 63% of Americans do not have a $500 or $1000 reserve fund to meet emergency needs. In the meantime, the proportion of temporary or gig workers in the US economy continues to grow. This one-time $1200 relief check that we are expecting from the government is very little. How will it help a food service worker who is expecting a child? The absence of reserve funds means that a sick worker is under much pressure to continue working. This will likely prolong the pandemic. It will also make the US population more vulnerable to the next emerging disease.
There will also be significant changes in lifestyle. I expect that even after the pandemic is over, more and more people will work and learn from home. Many companies will learn that they can manage quite well without workers on premise. More work will be done offsite and online. Similarly, more educational institutions will find that online instruction is a viable option. More schools and colleges will switch to the online mode. There will be less meetings, conferences and air travel. In the meantime, the Internet and communication technologies will improve due to increased demand. On the positive side, less commuting, less office work and less air travel will help the environment. It means less carbon footprint. But this working from home trend only will only work for professional workers. What about the street vendors, food servers and small businesses? We live in a post-industrial age where the majority of the people work in service sector jobs which rely on foot traffic and physical contact. What is going to happen to retail business now? More Internet-based business, more automation of jobs and less physical businesses? Will Amazon.com grow richer and the small vendors perish?
A “recovery” for the Coronavirus economic disruption will take a much longer time than previous recessions or the Great Depression. The reason is simple — the deep problems that have been developing in our economic system, which we have been postponing to address suddenly surfaces to the top. There is no way to avoid them now. But it will take time to come up with a new way of living which is sensible, environmentally-friendly and economically just. So, this crisis will be a long one because we will have to reinvent our way of life.