The Economy after COVID-19 Will Be Different from Before, Part One
As governors begin to lift restrictions on economic activity in their states, the temptation is to assume that things will just snap back and the economy will continue as before. This is almost certainly a mistake. We might all wish it to be otherwise, but angry protests from some people aside, polling data clearly show that Americans are generally still afraid of the virus and have changed their economic behavior in accordance with those fears. Whole sectors of the economy have had their parameters changed in a way that will require changes in how they operate. In other words, many industries have been disrupted. This will also likely mean a change in regulations will be necessary too.
The entrepreneur Balaji Srinivasan outlined some of these disrupted industries in a recent tweet. His list comprised:
K-12, bars, cities, retail, sports, hotels, airlines, offices, colleges, subways, concerts, medicine, Hollywood, immigration, conferences, supply chains, meat packing, movie theaters, and, erm, aircraft carriers.
Yet this long list isn’t exhaustive enough. An internal discussion with colleagues added:
Delivery, toll roads, rent/mortgage/debt collection, oil, short-term rental, car dealers, auto repair, music stores, restaurants, coffee shops, construction, assembly-line manufacturing, tourism, and travel.
There are doubtless many more.
It’s worth looking at some of these industries in a bit more detail and thinking about what the disrupted economy will look like—and how regulators will need to respond. Regulations, for instance, that might have been justifiable under old industry conditions could either be irrelevant or positively harmful under the new conditions. I will have more posts in this series looking at other sectors, but will start with just three.
Cities: One of the big losers of the pandemic is likely to be urbanism. People starting a family are more likely to want to leave the cities for the suburbs and people in general are less likely to want to use public transit. For those who remain, city planners are likely to want to reduce the number of cars in cities even further to give people more space to avoid each other while walking (this is already happening in some cities in Europe). This will drive even more economic activity to the suburbs. Commuting will be even more difficult as a result, likely intensifying a trend toward telework. This will further disrupt many other sectors such as restaurants and offices. We can expect the costs of getting around cities to increase sharply.
Offices: As already mentioned, there is going to be much more telework for those who can engage in it, which is predominantly office workers. People over 50 or so may require telework as an option, if the virus lingers. This will reduce the demand for office space, possibly significantly. In the presence of a likely supply glut, new office rents will fall. Competition among landlords will increase. Those who have new space may offer very enticing terms to get people out of older, more expensive rental agreements. If the oversupply continues, landlords might want to try to convert their office space to living space, running into zoning regulations. If they can, this might result in a reduction in apartment rental rates, which might ameliorate the potential exodus to the suburbs somewhat. The overall effect may be a considerable drop in the value of America’s highest priced land.
Restaurants: These businesses are going to be among the hardest hit. They will be faced with having to refashion their dining rooms and kitchens to allow for more distance between customers and between workers. This will almost certainly lower in-house revenue. Bars that have traditionally crowded people together, such as sports bars during a game, could be particularly hard hit. Some restaurants will pivot toward a delivery-first model. Sanitation of cutlery, glass, and flatware will become much more important—to the extent that many outlets will use disposable alternatives, which will in turn increase waste management issues. This combination of increased costs and decreased revenue will squeeze labor costs particularly. Regulations that privilege wages over tips will be a significant obstacle. Jurisdictions that have a lot of restaurants within them may have to reconsider minimum wage increases or face the prospect of huge numbers of closures.
As Henry Hazlitt said in Economics in One Lesson:
The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.
If the economy is to recover after this disaster, there need to be many more good economists in positions of power than bad economists. Time will tell.