Economic shocks like the coronavirus pandemic of 2020 only arrive once every few generations, and they bring about permanent and far-reaching change.
Measured by output, the world economy is well on the way to recovery from a slump the likes of which barely any of its 7.7 billion people have seen in their lifetimes. Vaccines should accelerate the rebound in 2021. But other legacies of Covid-19 will shape global growth for years to come.
Some are already discernible. The takeover of factory and service jobs by robots will advance, while white-collar workers get to stay home more. There’ll be more inequality between and within countries. Governments will play a larger role in the lives of citizens, spending—and owing—more money. What follows is an overview of some of the transformations under way.
Leviathan
Big government staged a comeback as the social contract between society and the state got rewritten on the fly. It became commonplace for authorities to track where people went and who they met—and to pay their wages when employers couldn’t manage it. In countries where free-market ideas had reigned for decades, safety nets had to be patched up.
To pay for these interventions, the world’s governments ran budget deficits that add up to $11 trillion this year, according to McKinsey & Co. There’s already a debate about how long such spending can continue, and when taxpayers will have to start footing the bill. At least in developed economies, ultralow interest rates and unfazed financial markets don’t point to a near-term crisis.
In the longer run, a big rethink in economics is changing minds about public debt. The new consensus says governments have more room to spend in a low-inflation world, and should use fiscal policy more proactively to drive their economies. Advocates of Modern Monetary Theory say they pioneered those arguments and the mainstream is only now catching up.
Even Easier Money
Central banks were plunged back into printing money. Interest rates hit new record lows. Central bankers stepped up their quantitative easing, widening it to buy corporate as well as government debt.
All these monetary interventions have created some of the easiest financial conditions in history—and unleashed a frenzy of speculative investment, which has left plenty of analysts worried about moral hazards ahead. But the central-bank policies will be hard to reverse, especially if labor markets remain fractured and companies continue their recent run-up in saving.
And history shows that pandemics depress interest rates for a long time, according to a paper published this year. It found that a quarter-century after the disease struck, rates were typically some 1.5 percentage points lower than they otherwise would have been.
Debts and Zombies
Governments offered credit as a lifeline during the pandemic—and business grabbed it. One result was a surge in corporate debt levels across the developed world. The Bank for International Settlements calculates that nonfinancial companies borrowed a net $3.36 trillion in the first half of 2020.
With revenues plunging in many industries because of lockdowns or consumer caution, and losses eating into business balance sheets, the conditions are in place for a “major corporate solvency crisis,” according to one new report.