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IN
AUGUST 2005 the unemployment rate in Louisiana was 5.4%, close to its
all-time low. Then Hurricane Katrina hit. The storm destroyed some
firms, while others were forced to close permanently. Within a month,
Louisiana’s unemployment rate had more than doubled.
Now
America as a whole faces a similar shock. From a five-decade low,
unemployment is soaring upwards, as the onrushing coronavirus pandemic
forces the economy to shut down. Millions of Americans are filing for
financial assistance. The jobs report for March, to be published on
April 3rd, is a flavour of what is to come—though because the survey
focused on early to mid-March, before the lockdowns really got going, it
is likely to give a misleadingly rosy view of the true situation. How
bad could the labour market get?
GDP
growth and the unemployment rate tend to move in opposite directions.
Unemployment hit an all-time high in 1933, during the Great Depression
(see chart). The coronavirus-induced shutdowns are expected to lead to a
year-on-year GDP decline of about 10% in the second quarter of this
year. Such a steep fall in economic output implies an unemployment rate
of about 9% in that quarter, based on past relationships, which would be
roughly in line with the peak reached during the financial crisis of
2007-09.
But the coronavirus epidemic
is not like past recessions. For one thing, hiring could be even lower
than is typical. Delivery firms notwithstanding, surveys suggest that
firms’ hiring intentions are as low or lower than they were in 2008. And
applying for a job is especially difficult with cities in lockdown.
Even without a single virus-induced layoff, hiring freezes would lead to
sharply rising unemployment. For instance, young people entering the
labour market for the first time would struggle to find work.
The
decline in GDP associated with the lockdowns is also particularly
concentrated in labour-intensive industries such as leisure and
hospitality. Mark Zandi of Moody’s Analytics, a research firm,
calculates that more than 30m American jobs are highly vulnerable to
closures associated with covid-19. Were they all to disappear,
unemployment would probably rise above 20%. Research published by the
Federal Reserve Bank of St Louis is even gloomier. It suggests that
close to 50m Americans could lose their jobs in the second quarter of
this year—enough to push the unemployment rate above 30%.
The
numbers will probably not get that bad. In part that is a matter of
statistical definitions. To be officially classified as unemployed,
jobless folk need to be “actively seeking work”—which is rather
difficult in the current circumstances. Some people could end up being
counted as “economically inactive” rather than unemployed, which would
hold down the official unemployment rate (a similar phenomenon occurred
in Louisiana after Katrina).
America’s
economic-stimulus bill will be a more genuine check on rising
joblessness. The $350bn (1.6% of GDP) set aside for small firms’ costs
is enough to cover the compensation of all at-risk workers for perhaps
seven weeks, according to our calculations, making it less likely that
bosses will let them go. Other measures in the package should support
consumption, and thus demand for labour. In a report published on March
31st Goldman Sachs, a bank, argued that unemployment will peak in the
third quarter of this year at nearly 15%—an estimate that is roughly in
line with those of other forecasters.
A
big jump in unemployment is less of a problem if it quickly falls once
the lockdown ends. Louisiana offers an encouraging precedent. After a
few bad months in late 2005, the state’s unemployment rate dropped
almost as sharply as it had risen, falling in line with the rest of the
country. Whether the economy will prove so elastic this time is another
matter. Travellers and restaurant-goers will be cautious until some sort
of vaccine or treatment is widely available; social-distancing rules,
even if relaxed, will continue for some time. Goldman Sachs’s
researchers reckon that it will take until 2023 for unemployment to fall
back below 4%. The lockdowns should be temporary, but the economic
consequences will feel much more permanent.■
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“THE GOVERNMENT
intervention is not a government takeover,” the American president
argued. “Its purpose is not to weaken the free market. It is to preserve
the free market.” The IMF pointed to the “unprecedented
policy actions undertaken by central banks and governments worldwide”.
The economic response to the financial meltdown of 2007-09 was big
enough. But in answer to the covid-19 pandemic policymakers are
launching even bigger, more radical interventions. Putting the economy
on a wartime footing is supposed to be temporary. A look at 500 years of
governmental power, however, suggests another outcome: the state is
likely to play a very different role in the economy—not just during the
crisis, but long after.
The
policy response has been swift and decisive. Globally central banks
have cut interest rates by more than 0.5 percentage points since January
and have launched huge new quantitative-easing schemes (creating money
to buy bonds). Politicians are throwing open the fiscal spigots to
support the economy. As The Economist went to press, America’s
Congress was set to pass a bill that boosts spending by twice as much as
President Barack Obama’s package in 2009 (see article). On top of that, Britain, France and other countries have made credit guarantees worth as much as 15% of GDP,
seeking to prevent a cascade of defaults. On the most conservative
measure, the global stimulus from government spending this year will
exceed 2% of global GDP, a much bigger push than was seen
in 2007-09 (see chart 1). Even Germany, whose fiscal rectitude is the
punchline of economists’ jokes, is spending more (see article).
The upshot is that the state is swelling. Last year overall government spending accounted for 38% of GDP across the rich world. The stimulus effort, combined with a fall in nominal GDP in the next few months, will push that ratio well above 40%, perhaps to its highest-ever level.
To
focus just on the numbers misses something crucial, though. There are
important qualitative changes under way in how policymakers manage the
economy—the responsibilities they have seized for themselves, what is
seen as a legitimate action and what is not, and the criteria used to
judge policy success or failure. On these measures, the world is in the
early stages of a revolution in economic policymaking.
Central
banks have in effect pledged to print as much money as necessary to
keep down government-borrowing costs. The European Central Bank is
promising more or less to buy everything that governments might issue;
this should reduce the gap in borrowing costs between weaker and
stronger euro-zone members, which widened in the early days of the
pandemic. On March 23rd America’s Federal Reserve promised to buy
unlimited quantities of Treasury bonds and agency mortgage-backed
securities, if necessary. The rise in borrowing caused by America’s
stimulus may be matched, at least initially, by bond purchases by the
Fed, which smells a lot like money-printing to finance deficits. The
central bank also announced new programmes to support the flow of credit
to companies and consumers. The Fed is now the direct lender of last
resort to the real economy, not just the financial system.
Politicians,
too, are ripping up the rulebook. In a standard recession firms are
allowed to go bust and people to become unemployed. Even in normal
economic times, roughly 8% of businesses in OECD
countries go under each year, while 10% or so of the workforce lose a
job. Now governments hope to stop this from happening entirely.
President Emmanuel Macron does not speak only for France when he vows
that no firm will “face the risk of bankruptcy” as a result of the
pandemic. Boris Johnson, Britain’s prime minister, contrasts his
government’s response with the one during the last financial crisis:
“everybody said we bailed out the banks and we didn’t look after the
people who really suffered”. Larry Kudlow, the director of America’s
National Economic Council, calls America’s fiscal stimulus “the single
largest Main Street assistance programme in the history of the United
States”, comparing it favourably with Wall Street bail-outs a decade
ago.
To
that end, governments across the rich world are channelling vast sums
to firms, providing them with grants and cheap loans in an attempt to
preserve jobs and prevent them from going bust. In some cases the
government is paying the wages of people who cannot work safely: the EU
in particular has embraced this policy, while the British state will
pay up to 80% of the wages of furloughed workers. The American package
includes loans to small businesses that will be forgiven if workers are
not laid off. Households across the rich world are being given temporary
relief on mortgages, other debts, rent and utility bills. In America
people will also be sent cheques worth up to $1,200.
The
vast majority of economists support these measures. Nominally they are
temporary, designed to hold the economy in an induced coma until the
pandemic passes, at which point the world is supposed to revert to the
status quo ante. But history suggests that a return to pre-covid days is
unlikely. Two lessons stand out. The first is that governmental control
over the economy takes a large step up during periods of crisis—and in
particular war. The second is that the forces encouraging governments to
retain and expand economic control are stronger than the forces
encouraging them to relinquish it, meaning that a “temporary” expansion
of state power tends to become permanent.
In
recent centuries government spending across the capitalist world has
leapt. In the 1600s the outlays of the entire English state accounted
for about 5% of GDP, with practically no spending on
public health or education, nor much regulation of economic life, save
for crude contract enforcement (see chart 2). That began to change in
the 18th century, and from the end of the 19th century Britain and other
capitalist countries saw increased state intervention, with more
government resources being devoted to public goods such as welfare and
education and commensurate increases in taxes (see chart 3).
Governments have had some lean periods. In Victorian Britain state spending fell as a share of GDP—though
that was largely because economic growth was so rapid, and the measure
in chart 2 excludes spending by local governments, which became
exceptionally powerful over the period. In the 1980s Ronald Reagan
succeeded in stabilising America’s day-to-day federal spending. His
reforms, as well as those of Margaret Thatcher in Britain, reduced the
role of government in fixing prices; privatisations encouraged
profit-making firms to provide formerly state-run services such as power
and transport. Yet even during Reagan’s presidency the number of pages
of federal regulations rose by 14%.
A
back-of-the-envelope calculation finds that, of the more than 50
countries for which there are long-run fiscal data, two-thirds saw their
government-spending-to-GDP ratio increase between 1988 and 2018. America’s ratio of day-to-day public spending to GDP
is eight percentage points higher than it was in 1962, when Milton
Friedman wrote “Capitalism and Freedom”, a book which warned of the
dangers of socialism.
Historians argue
over why the public sector has a tendency to expand. In the 19th century
Adolph Wagner, a German economist, suggested that as places got richer,
demands on government grew. An increasingly complex production process
needed more regulation and contractual enforcement. Wealthier people
would also demand more public welfare provision, the theory goes,
perhaps because they worried less about their own material situation and
could thus turn their attention to others.
Wagner’s
theories also pointed to what economists call “hysteresis” in fiscal
policy. Governments may intend to boost spending only for a short while.
But then expectations change, making such expansionism hard to undo. It
is now common sense that the state should provide education to children
at no cost to parents, or support people who are out of work. American
governments have in recent decades cut the share of public spending
devoted to welfare. However, it remains politically impossible to bring
it down to anywhere near its level in the mid-1960s, before President
Lyndon Johnson’s “war on poverty” was launched. The upshot is that while
it is easy to ratchet state spending up, it is much harder to push it
down.
Perhaps the most important
lesson of 500 years of history, however, is that nothing has helped
boost state power in Europe and America more than crises. Historians
broadly agree that the growing fiscal capacity of capitalist countries
from the 1700s onwards was linked to the need to fight increasingly
sprawling and expensive wars, especially those using navies and where
the field of battle was far from home. (The Seven Years War of 1756-63
is widely considered to be the first global war because it involved a
large number of countries, often fighting in foreign theatres.)
To
win, countries required increasingly complex, well-resourced
administrations which could supply fighters with weapons that worked and
food that had not rotted. They also needed the money to pay for it,
whether by levying more taxes or by becoming a reliable borrower in
markets—which called for yet more bureaucracy. Growing state capacity,
in turn, allowed for the emergence of the capitalism we know today, with
properly regulated markets, efficient telecoms and transport, and
healthy and educated citizens.
The
winners of those wars also seized control of resources, from sugar and
spices to linens, which proved integral to industrialisation. So it is
no surprise that historians contend that wars and other crises have been
an engine of economic development. It is no coincidence that the
Netherlands, the first country to embrace capitalism, in the 17th
century, was also at the time the world’s pre-eminent naval power,
fighting and winning numerous wars over the period; or that Britain,
which came to dominate the seas in the 18th century, then became the
world’s largest economy. According to Larry Neal of the University of
Illinois at Urbana-Champaign, the Industrial Revolution “occurred
precisely during and because of the Napoleonic wars” of the late 18th
and early 19th centuries.
The responses
to crises since then have further consolidated the power of the state.
France’s top rate of income tax was zero in 1914; a year after the end
of the first world war it was 50%. Canada introduced income tax in 1917
as a “temporary” measure to finance the war. During the second world war
income tax in America turned from a “class tax” to a “mass tax”, with
the number of payers rising from 7m in 1940 to 42m in 1945 (today more
than twice as many Americans are caught in the net). The second world
war also led to calls for the introduction of cradle-to-grave welfare
systems. So did the dynamics of the cold war: governments across the
capitalist world wanted to forestall a communist rebellion. The
state-led model pursued in Europe from the 1950s to the 1970s, in which
bureaucrats controlled services from power networks to transport
systems, would have been unimaginable without wartime experience, where
the state managed practically everything and ordinary people made
tremendous sacrifices, whether on the battlefield or at home.
The new ideology
What
will be the lasting effects of the covid-19 pandemic? Start with the
size of the state. Over the next year government debt will rise sharply,
as spending jumps and tax revenues collapse. When the economy recovers,
attention will turn to paying it down. “Capital and Ideology”, a new
book by Thomas Piketty, a French economist, shows that after the first
and second world wars many governments in the West turned to heavier
taxation of the incomes and wealth of the richest to achieve that goal.
Another option is “financial repression”, where governments force
citizens to lend to them at below-market rates (see article).
Central
banks’ innovations will also have lasting consequences. Few economists
believe that the explicit co-operation between the fiscal and monetary
authorities risks creating runaway inflation, as it has done in
Venezuela and Zimbabwe, any time soon. (If anything, the bigger worry
right now is deflation, not least because of a collapse in oil prices.)
However, just as the use of quantitative easing in 2008-09 opened the
door to more of the same down the road, it will become harder to make
the argument that the “magic money tree” does not exist. Politicians in
the future may lean on central banks to peg interest rates at zero to
support government borrowing, even during times of economic growth and
low unemployment. If central banks promised to fund the government
during the coronavirus pandemic, they might ask, then why shouldn’t they
also fund it to launch an expensive war against a foreign enemy or to
invest in a Green New Deal?
The
final impact of the current interventions relates to policymakers’
tolerance for risk. No one cheers when a firm goes bust, but often the
process helps shift resources from less efficient to more efficient
uses, thus raising productivity and average living standards over time.
The novel notion that the government needs to preserve firms, jobs and
workers’ incomes at practically any cost may endure, especially if the
intervention proves successful in narrow terms. The policy will formally
end once the pandemic has passed, but political pressure for similar
support schemes—from the nationalisation of tottering firms to the
provision of a universal basic income—may well be higher the next time a
sharp downturn comes along. If politicians are able to preserve jobs
and incomes during this crisis, many people will see little reason why
they should not try again in the next one.
Calls
for a more activist fiscal-monetary government will come against a
backdrop of structurally higher demand for state spending. The public
sector tends to provide labour-intensive services in which productivity
improvements are difficult, such as health care and education. It must
match the salaries of workers in other sectors in order to retain its
own, even as they become less productive relative to the overall
economy—a phenomenon which raises the cost of provision. Long before the
coronavirus pandemic, fiscal wonks argued that government spending
would soar during the 2020s, even in the absence of a crisis. That was
not only or even primarily because an ageing population would raise
demand for health care, but because health systems would be able to
treat a wider range of illnesses more effectively, which would push up
costs.
The likely economic effects of
the pandemic reach far beyond the role of the state. Countries could
become even less welcoming to immigrants—the better, they may believe,
to reduce the likelihood of infection from foreign arrivals. On the same
logic, resistance to the development of dense urban centres could
mount, thereby limiting construction of new housing and raising costs.
More countries may seek to become self-sufficient in the production of
“strategic” commodities such as medicines, medical equipment and even
toilet roll, contributing to a further rollback of globalisation. But
the redefined role of the state could prove to be the most significant
shift. The rules of the game have been moving in one direction for
centuries. Another radical change is looming.■
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This article appeared in the Briefing section of the print edition under the headline "Building up the pillars of state"
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THE NEW
coronavirus is causing havoc in rich countries. Often overlooked is the
damage it will cause in poor ones, which could be even worse. Official
data do not begin to tell the story. As of March 25th Africa had
reported only 2,800 infections so far; India, only 650. But the virus is
in nearly every country and will surely spread. There is no vaccine.
There is no cure. A very rough guess is that, without a campaign of
social distancing, between 25% and 80% of a typical population will be
infected. Of these, perhaps 4.4% will be seriously sick and a third of
those will need intensive care. For poor places, this implies calamity.
Social
distancing is practically impossible if you live in a crowded slum.
Hand-washing is hard if you have no running water (see article).
Governments may tell people not to go out to work, but if that means
their families will not eat, they will go out anyway. If prevented, they
may riot.
So covid-19 could soon be
all over poor countries. And their health-care systems are in no
position to cope. Many cannot deal with the infectious diseases they
already know, let alone a new and highly contagious one. Health spending
per head in Pakistan is one two-hundredth the level in America. Uganda
has more government ministers than intensive-care beds. Throughout
history, the poor have been hardest-hit by pandemics. Most people who
die of AIDS are African. The Spanish flu wiped out 6% of India’s entire population.
Dozens of developing countries have ordered lockdowns. India has announced a “total ban” on leaving home for 21 days (see article). South Africa has deployed the army to help enforce one. They may slow the disease, but they are unlikely to stop it.
Many
places are still in denial. Street markets in Myanmar are packed.
Brazil’s populist president, Jair Bolsonaro, dismisses covid-19 as just
“a sniffle” (see article).
Some leaders are clueless. Tanzania’s president, John Magufuli, said
churches should stay open because the coronavirus is “satanic” and
“cannot survive in the body of Christ”. Many autocrats see covid-19 as a
handy excuse to tighten their grip. Expect some to ban political
rallies, postpone elections and extend surveillance over citizens’ daily
lives—all to protect public health, of course.
Granted,
there are some reasons for hope. Poor countries are young—the median
age in Africa is under 20—and the young appear less likely to die from
an infection. The poorest are very rural: two-thirds of people in
countries with incomes per head below $1,000 a year live in the
countryside, compared with less than a fifth in rich countries. Farmers
can grow yams without breathing viral droplets on each other. The
climate may help. It is possible, though far from certain, that hot
weather slows the spread of covid-19. Some places have useful
experience. Countries that endured Ebola learned a lot about
hand-washing, contact-tracing and securing public trust.
Alas,
even the good news comes with caveats. People in poor countries may be
young, but they often have weak lungs or immune systems, because of
malnutrition, tuberculosis or HIV. Rural folk may get the
virus later, but they will probably still get it. Lockdowns will be
hard to sustain unless governments can provide a generous safety-net.
Firms need credit to avoid laying off staff. Informal workers need cash
to tide them over. Unfortunately, poor countries do not have the
financial muscle to provide these things, and covid-19 has just made it
much harder.
Demand has collapsed for
the commodities on which many emerging markets depend, from crude oil to
fresh flowers. Tourism has tanked. No one wants to visit the Masai Mara
or Machu Picchu just now. Foreign investors have pulled $83bn from
emerging markets since the start of the crisis, the largest capital
outflow ever recorded, says the Institute of International Finance, a
trade group. Remittances, usually a safety-net in hard times, may tumble
as migrants in rich countries lose their jobs.
Many
poor and middle-income countries face a balance-of-payments crisis and a
collapse in government revenues as they need to raise health-related
spending and imports (to reduce the death toll) and welfare (so that
workers can isolate themselves without running out of money). Whereas
governments in rich countries can borrow cheaply in a crisis as
investors flock to safety, poor countries see their borrowing costs
soar. The trade-off between saving lives and saving livelihoods is
excruciating. The worry, as Imran Khan, Pakistan’s prime minister says,
is that “if we shut down the cities...we will save [people] from corona
at one end, but they will die from hunger.”
Far from helping, many better-off countries have taken a nationalist turn. Some places, such as the EU,
are restricting the export of medical kit. That goes against the values
they profess to hold. Other countries, such as Kazakhstan, are curbing
exports of food, which is not in short supply. If global trade is gummed
up, the economic damage will be far greater. For poor countries that
rely on imported food, it could be deadly.
Since
so much remains unknown about covid-19, any response must be based on
imperfect information. But some things are both urgent and obvious.
Governments in poor countries, as elsewhere, should supply people with
timely, accurate information, by any means practical. No cover-ups, no
internet shut-downs, no arresting of those who share unwelcome news.
Time to be generous
The rich world, meanwhile, should help the poor world swiftly and copiously. The IMF says it is ready to deploy its $1trn lending capacity. Much more may be needed. As The Economist went to press, the G20
was about to set out a plan. It should be generous. Some of those vast
rich-world bail-out pots should be used to cushion the suffering of the
global south. China is winning influence with high-profile deliveries of
medical equipment. Poor countries will remember who helped them.
As past campaigns against malaria and HIV
showed, it takes a co-ordinated global effort to roll back a global
scourge. It is too late to avoid a large number of deaths, but not too
late to avert catastrophe. And it is in rich countries’ interests to
think globally as well as locally. If covid-19 is left to ravage the
emerging world, it will soon spread back to the rich one. ■
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This article appeared in the Leaders section of the print edition under the headline "The next calamity"
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EVEN
TO THE housebound and socially distant, the signs of a contraction are
apparent. The 18th Street corridor of Adams Morgan, a typically bustling
stretch of restaurants and shops in Washington, DC, is filled with
shuttered businesses—closed as part of the nationwide effort to contain
the epidemic of covid-19 that had, as of March 24th, infected 53,740
Americans and killed 706, according to official counts. One fledgling
business—a new bar calling itself Death Punch—never managed to open its
doors. Down the road, an established whiskey bar called Jack Rose has
been selling off its gargantuan collection at discount to support its
staff. The queue for it snaked several blocks—a long dotted line of
aficionados standing a careful six feet apart.
These
are just the premonitions of the pain to come. Unemployment will rocket
as much of the economy is put into a sort of medically induced coma. So
many unemployment claims are being filed in Ohio that the state website
has crashed. The national weekly unemployment numbers that will be
released on March 26th are widely expected to be the worst in history.
Goldman Sachs has predicted that there could be 2.25m new claims over
the week—triple the previous record. And just as the covid-19 epidemic
has not yet reached its apex, neither has the economic crisis. Morgan
Stanley predicts that GDP will fall 30% year-on-year in the second
quarter and unemployment will rise to 12.8%, compared with just 3.5% in
February.
To head off the damage,
Congress is preparing the largest fiscal stimulus in modern history. Its
provisions—including bail-outs for firms both big and small, expanded
unemployment-insurance benefits and a straight cash transfer to many
Americans—are expected to cost close to $2trn, roughly one-tenth of GDP.
This is the third substantial piece of legislation to deal with
covid-19. Depending on the harm to come, even that may not be enough.
Whole
industries rely on congregating people. So too, unfortunately, does the
virus. As of March 24th, 12 states had ordered all non-essential
businesses closed. Seventeen states, covering half the country’s
population, had urged residents to stay home. Many white-collar tasks
can just about be performed remotely. But cruelly, those likeliest to
lose income or their jobs are in more precarious, less well-paid
industries—restaurant staff (of which there are 9.6m), retailers (8.8m)
or hotel workers (2m). If they lose their jobs, the effects will ripple
through the economy.
One corrective for
this problem is unemployment insurance. Yet this is not as robust as in
other parts of the rich world. The American version replaces a smaller
share of previous income than the average in the OECD, a club of mostly
rich countries, and declines faster with time. Individual states, which
administer the programme jointly with the federal government, differ in
their generosity: Mississippi caps its maximum benefits at a paltry $235
a week.
At
the insistence of Democrats, Congress would make this part of the
safety-net decidedly more European, at least temporarily. The federal
government would pay to top up unemployment-benefit levels by $600 a
week—an enormous increase, given that the current weekly average is
$385. The set of people eligible for benefits would also be expanded to
include independent contractors, such as gig-economy workers. Those who
have been laid off but not fired could receive compensation for lost
hours. And the length of the benefit period would be extended from the
usual 26 weeks to 39 weeks. The cost of all of this is thought to be
$260bn: a serious expansion of a targeted programme.
A
similarly gargantuan wad of cash—$250bn—will be spent on a less
targeted scheme, sending cheques to Americans direct from Uncle Sam.
Below some generous income thresholds ($75,000 a year for a single
person and $150,000 for a married couple) every family can expect $1,200
per adult and $500 per child. This is the best version of a cash
transfer that was proposed. Previously the White House had pushed the
idea of a payroll-tax holiday; an early version of the stimulus bill
ignored people who did not file taxes. Both would have excluded those
with the lowest incomes from an ostensibly universal programme. Reaching
everyone eligible now will require ingenuity, such as using
administrative data from states, says Sam Hammond of the Niskanen
Centre, a think-tank. But even if sent quickly, the cheques could be
both too small for those who need them and too big for those who do not.
The
government is also expected to set aside $500bn to stabilise firms and
states. The capital could faciliate lending several times larger than
that. Democrats in Congress and the White House got stuck on a
(relatively) small portion of the programme, the $75bn set aside to bail
out big embattled firms like airlines and those deemed critical to
national security—because of the latitude the treasury secretary would
have to set and disclose the terms of loans. A compromise struck in the
dead of night bulked up independent oversight.
A
more intriguing scheme is the $350bn set aside to save small and
medium-size firms (those with fewer than 500 employees). The programme
would give loans of up to $10m without interest or fees to pay for
employees, rental costs and sundry other expenses. These would then be
forgiven in proportion to the share of staff spared the sack: a firm
that kept all employees would owe nothing; one that dispensed with half
would owe half, and so on.
This
is a more complicated idea than those devised by European finance
ministers facing down the pandemic. Rishi Sunak, the British chancellor,
pledged to pay up to 80% of wages for furloughed workers; the Danish
government could pay up to 90% of the costs. The added hurdle in America
may mean that the most sophisticated operations get the grant-loans (or
“groans” in bureaucratic argot), while mom-and-pop operations languish.
It may also mean that even more money will be needed. Research from
Glenn Hubbard, an economist at Columbia Business School, and Michael
Strain of the American Enterprise Institute, a think-tank, estimates
that total needs could amount to $1.2trn—roughly triple the sum
allocated. With the ink not yet dry on the phase-three bill, bigger
bail-outs may be broached in a future phase-four bill.
The
extraordinary legislation is not intended to avoid the recession that
already seems to have arrived, but to spur the fastest possible rebound.
This of course requires that the cause—the covid-19 pandemic—is
effectively dealt with first.
But after
a brief period of taking the virus seriously, President Donald Trump
seems eager to lift restrictions as soon as possible. He has taken to
saying that “the cure cannot be worse than the problem itself”, and that
he wants the country “opened up and just raring to go by Easter”, which
epidemiological projections suggest is unwise. The collapse of the
stockmarket, which used to be Mr Trump’s barometer of success, may be
spooking the president. Markets rose in anticipation of the coming
stimulus package. But pre-emptively relaxing the restrictions would
result in deep harm both to public health and the economy.
Because
health authority is devolved to the states, it is unlikely that Mr
Trump would pre-empt local declarations of emergency. But some states
could follow suit, and the president’s supporters might not adhere to
the recommended course of social distancing. Already, the
lieutenant-governor of Texas has suggested that the elderly might risk
death for the sake of the economy. Liberty University, an evangelical
Christian institution led by a devotee of the president’s, is proudly
inviting thousands of students back to campus in defiance of
public-health advice.
Mr
Trump appears to be defaulting into an old playbook—vacillating wildly
in the hope of winning concessions. What may work with Democrats or
North Korean dictators has no chance against a virus, however. And as
things worsen, as seems likely, such irresolution may look like
political malpractice. Already, New York appears to be a new disease
epicentre. “The apex is higher than we thought and the apex is sooner
than we thought,” said Andrew Cuomo, the governor of New York, in his
address to citizens. He is warning that the city’s health system could
be overwhelmed by lack of ventilators and protective equipment for
staff. The medicine—a controlled, national shutdown of the economy—may
be strong stuff. But a premature reopening, leading to rampant
transmission of the virus, could produce something far worse.
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WHEN
THE financial crisis rocked the business world in 2007-09, boardrooms
turned to corporate finance chiefs. A good CFO could save a company; a
bad one might bury it. The covid-19 pandemic presents a different
challenge—and highlights the role of another corporate function, often
unfairly dismissed as soft. Never before have more firms needed a
hard-headed HR boss.
The
duties of chief people officers, as human-resources heads are sometimes
called, look critical right now. They must keep employees healthy;
maintain their morale; oversee a vast remote-working experiment; and, as
firms retrench, consider whether, when and how to lay workers off.
Their in-trays are bulging.
Once
derided as “pay and parties” managers, by the early 1990s HR chiefs
turned to compliance, keeping firms out of the courts (and papers). A
subsequent string of corporate imbroglios elevated their status, notes
Patrick Wright of the University of South Carolina. In the wake of
executive-pay scandals at companies such as WorldCom and Tyco in the
2000s they became more involved in remuneration. A decade later bungled
successions, for example at HP, a printer-maker which sacked two bosses
in as many years, left them with a bigger say in filling top jobs. In
the past few years they have dealt with companies’ often very public “me
too” troubles.
As
recruiting and retaining skilled workers became chief executives’ big
preoccupation—four-fifths now worry about skill shortages, up from half
in 2012—HR heads’ desks moved ever closer to the corner office. Today
many reside right next to the boss. Shareholders are inviting more
outside HR chiefs to boards. In America their salaries remain lower than
CFOs’ but have risen 20% faster since 2010 (see chart).
A
higher profile entails new expectations. HR was once the domain of
history graduates and masters in labour relations; nowadays plenty hold
business degrees. Although most firms recruit them from HR jobs, more
are choosing outsiders or unconventional candidates. According to
Russell Reynolds, an executive-search firm, HR heads appointed to
Fortune 100 companies between 2016 and 2019 were around 50% likelier
than earlier hires to have worked abroad, in general management or in
finance.
Before covid-19, tight labour
markets and empowered employees pressed employers to understand how to
get the most out of their staff, says Dane Holmes, a former head of
human-capital management at Goldman Sachs, an investment bank, who now
runs an HR-analytics firm. Diane Gherson, who runs HR at IBM, overhauled
the computing giant’s performance management using big data. Algorithms
now challenge IBM managers’ instincts on pay and promotion, and alert
Ms Gherson’s team when staff are at risk of fleeing (often before they
realise it themselves).
The pandemic
makes such “people analytics” more relevant. Beth Galetti, Ms Gherson’s
opposite number at Amazon, an engineer with no HR experience before
joining the e-commerce titan, oversees 1,000 developers working
exclusively on HR software. Amazon’s pre-outbreak investment in digital
induction for fresh hires is paying off. “We on-boarded 1,700 new
corporate employees on [March 16th] alone,” Ms Galetti reports.
Covid-19
may lead more HR chiefs to adopt such systems. In the short run many
have more pressing problems. Mala Singh, chief people officer at EA, a
maker of video games, represents the c-suite on the team tasked with
pandemic response. This now occupies 60-70% of her (long) day. Her team
has been getting staff desks, computers, even noise-cancelling
headphones. A bigger concern was balancing work with child care. Ms
Singh told the caregivers on EA staff to take as much time as they need
to adapt without using up paid leave. She is digitally monitoring
employee sentiment, particularly anxiety. In a creative business like
EA’s, “having someone stressed about their family situation does not
enable productive work”, she explains.
Many
companies, especially outside the knowledge economy, face tougher
choices. HR leaders must strike a balance between a firm’s professed
purpose, which these days often involves treating staff decently, and
the bottom line, observes Dan Kaplan of Korn Ferry, a consultancy. The
instinct is to cut costs through mass redundancies, as some hotel
chains, airlines and others have begun doing. Rather than slash payrolls
indiscriminately, says Bill Schaninger of McKinsey, another
consultancy, good HR heads can use the crisis to reconfigure company
workflow: what needs to be done by whom, what can be automated and what
requires people to share the same space. Some workers who at first
appear redundant may be redeployed or reskilled.
The
most far-sighted HR-ers at the most resilient companies are already
starting to look beyond the flattened curve. Although not quite
recruiting—times are too uncertain—Ms Gherson has begun to court talent
at rival firms. Now that everyone is working from home, she says, no one
is listening in on their calls. For a savvy HR chief, “it’s the perfect
opportunity.”
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PLANET EARTH
is shutting down. In the struggle to get a grip on covid-19, one
country after another is demanding that its citizens shun society. As
that sends economies reeling, desperate governments are trying to tide
over companies and consumers by handing out trillions of dollars in aid
and loan guarantees. Nobody can be sure how well these rescues will
work.
But
there is worse. Troubling new findings suggest that stopping the
pandemic might require repeated shutdowns. And yet it is also now clear
that such a strategy would condemn the world economy to grave—perhaps
intolerable—harm. Some very hard choices lie ahead.
Barely
12 weeks after the first reports of people mysteriously falling ill in
Wuhan, in central China, the world is beginning to grasp the pandemic’s
true human and economic toll. As of March 18th SARS-CoV-2,
the virus behind covid-19, had registered 134,000 infections outside
China in 155 countries and territories. In just seven days that is an
increase of almost 90,000 cases and 43 countries and territories. The
real number of cases is thought to be at least an order of magnitude
greater.
It has become clear that the economy is taking a much worse battering than analysts had expected (see Briefing).
Data for January and February show that industrial output in China,
which had been forecast to fall by 3% compared with a year earlier, was
down by 13.5%. Retail sales were not 4% lower, but 20.5%. Fixed-asset
investment, which measures the spending on such things as machinery and
infrastructure, declined by 24%, six times more than predicted. That has
sent economic forecasters the world over scurrying to revise down their
predictions. Faced with the most brutal recession in living memory,
governments are setting out rescue packages on a scale that exceeds even
the financial crisis of 2007-09 (see leader).
ADVERTISING
This
is the backdrop for fundamental choices about how to manage the
disease. Using an epidemiological model, a group from Imperial College
in London this week set out a framework to help policymakers think about
what lies ahead. It is bleak.
One
approach is mitigation, “flattening the curve” to make the pandemic less
intense by, say, isolating cases and quarantining infected households.
The other is to suppress it with a broader range of measures, including
shutting in everybody, other than those who cannot work from home, and
closing schools and universities. Mitigation curbs the pandemic,
suppression aims to stop it in its tracks.
The
modellers found that, were the virus left to spread, it would cause
around 2.2m deaths in America and 500,000 in Britain by the end of
summer. In advanced economies, they concluded, three months of
curve-flattening, including two-week quarantines of infected households,
would at best prevent only about half of these. Moreover, peak demand
for intensive care would still be eight times the surge capacity of
Britain’s National Health Service, leading to many more deaths that the
model did not attempt to compute. If that pattern holds in other parts
of Europe, even its best-resourced health systems, including Germany’s,
would be overwhelmed.
No wonder
governments are opting for the more stringent controls needed to
suppress the pandemic. Suppression has the advantage that it has worked
in China. On March 18th Italy added 4,207 new cases whereas Wuhan
counted none at all. China has recorded a total of just over 80,000
cases in a population of 1.4bn people. For comparison, the Imperial
group estimated that the virus left to itself would infect more than 80%
of the population in Britain and America.
But
that is why suppression has a sting in its tail. By keeping infection
rates relatively low, it leaves many people susceptible to the virus.
And since covid-19 is now so widespread, within countries and around the
world, the Imperial model suggests that epidemics would return within a
few weeks of the restrictions being lifted. To avoid this, countries
must suppress the disease each time it resurfaces, spending at least
half their time in lockdown. This on-off cycle must be repeated until
either the disease has worked through the population or there is a
vaccine which could be months away, if one works at all.
This
is just a model, and models are just educated guesses based on the best
evidence. Hence the importance of watching China to see if life there
can return to normal without the disease breaking out again. The hope is
that teams of epidemiologists can test on a massive scale so as to
catch new cases early, trace their contacts and quarantine them without
turning society upside down. Perhaps they will be helped by new drugs,
such as a Japanese antiviral compound which China this week said was
promising.
But this is just a hope, and
hope is not a policy. The bitter truth is that mitigation costs too
many lives and suppression may be economically unsustainable. After a
few iterations governments might not have the capacity to carry
businesses and consumers. Ordinary people might not tolerate the
upheaval. The cost of repeated isolation, measured by mental well-being
and the long-term health of the rest of the population, might not
justify it.
In the real world there are
trade-offs between the two strategies, though governments can make both
more efficient. South Korea, China and Italy have shown that this
starts with mass-testing. The more clearly you can identify who has the
disease, the less you must depend upon indiscriminate restrictions.
Tests for antibodies to the virus, picking up who has been infected and
recovered, are needed to supplement today’s which are only valid just
before and during the illness (see article). That will let immune people go about their business in the knowledge that they cannot be a source of further infections.
A
second line of attack is to use technology to administer quarantines
and social distancing. China is using apps to certify who is clear of
the disease and who is not. Both it and South Korea are using big data
and social media to trace infections, alert people to hotspots and round
up contacts. South Korea changed the law to allow the state to gain
access to medical records and share them without a warrant. In normal
times many democracies might find that too intrusive. Times are not
normal.
Last, governments should invest
in health care, even if their efforts take months to bear fruit and may
never be needed. They should increase the surge capacity of intensive
care. Countries like Britain and America are desperately short of beds,
specialists and ventilators. They should define the best treatment
protocols, develop vaccines and test new therapeutic drugs. All this
would make mitigation less lethal and suppression cheaper.
Be
under no illusions. Such measures might still not prevent the pandemic
from extracting a heavy toll. Today governments seem to be committed to
suppression, whatever the cost. But if the disease is not conquered
quickly, they will edge towards mitigation, even if that will result in
many more deaths. Understandably, just now that is not a trade-off any
government is willing to contemplate. They may soon have no choice. ■
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This article appeared in the Leaders section of the print edition under the headline "Closed"
