Tomorrow, and tomorrow, and tomorrow
Lights at the end of tunnels; the future of remote work
|Ryan Avent||Apr 6|| 1|
Here in Northern Virginia, it’s that time of spring when the landscape looks different every morning. New flowers have bloomed, new trees have exploded in leaf, new allergens briefly convince you that you’ve contracted covid-19. The rapid change in scenery combines with the time dissolving sameness of lockdown life to create the impression that this state of the world has lasted a very long time indeed, perhaps forever. We’re all sick of it and want it to be over. That’s understandable. So is optimism about the possibility that hard-hit places like Italy and New York, which have suffered terribly in recent weeks, are approaching or passing a turning point beyond which new cases and deaths fall rather than rise.
But as important as it is to remember that things will eventually get better—how else can one expect to get through this?—we need to prepare for more hardship ahead. Why, you ask, is it so important to do such things, Captain Bringdown? False dawns risk undercutting our willingness to hang together and do what is necessary to truly see the pandemic off. That’s not just my guess. Recent surveys in Italy, for example, suggest that the public’s willingness to comply with extensions to restrictive measures is reduced if announced extensions are longer than had been expected. Expectations management matters. So yes, it’s important to understand that there is light at the end of the tunnel, but also that the tunnel is really damned long.
To wit, as encouraging as it is that places which have imposed very strict lockdowns are seeing a “flattening of the curve”, this unfortunately does not mean that we are just weeks away from beating this thing. This is especially true of America, where much of the country is not particularly locked down at all. Northern Virginia is a savvy, news-aware part of the country, and it is officially under a governor-imposed stay-at-home order. It nonetheless remains quite active. There are lots of people out and about, very few masks being worn, groups of teens hanging out together, groups of adults jogging and cycling together, and so on. I don’t imagine my corner of Virginia to be a massive outlier; some state governments have reacted much more slowly and incompletely than this one. Even as numbers of new cases in New York approach a peak, spread in other parts of the country continues to gather momentum.
And as crucially important as it is to arrest the first wave of cases and prevent it, as much as possible, from overwhelming hospital capacity, the first wave is not the end of things. New York State is home to about 20m people. As of right now, the state has just over 120,000 confirmed cases of the virus. Suppose that’s a wild undercount, and the actual number is ten times larger. It would still be the case, then, that more than 90% of the state’s population remains unexposed, and thus, in all likelihood, vulnerable, to covid-19. And that, in turn, means that the government must be very cautious in lifting restrictions on activity or new mass outbreaks will result. Hopefully by the middle of next year there will be a vaccine widely available. Until that time, attempts to get back to “normal” will mean many more cases and deaths.
It is conceivable that with the right strategy economies could be reopened safely before a vaccine is available. Given mass distribution and use of personal protective equipment, frequent mass testing, mass use of digital monitoring systems to track individuals in order to find and quarantine anyone exposed to an ill person—the approach used, more or less, in South Korea—people could go out and do their thing without sparking a new wave of infections. With a Herculean effort and some pretty radical policy action, countries which didn’t have much of this infrastructure in place prior to the pandemic (as South Korea did) could potentially mobilize and create it within 18 months. Perhaps you believe that America has the state capacity and the desire to do this. The US does after all have a long and proud history of being wildly incompetent and unprepared in the initial stages of one disaster or another, only to eventually get its shit together and do what is necessary. I fear that there just aren’t enough people who are worried enough, capable enough, with sufficient authority and public support to get us where we would need to be.
Without that option available, we are looking at an unprecedented decline in economic output in the first half of this year, followed by a weak and halting recovery. It’s a reasonable bet that when all is said and done, the decline in GDP in 2020 will be substantially larger than what we experienced in 2009, and the unemployment rate at the end of 2020 will be substantially higher than at the peak of the Great Recession. Even if everything magically returned to normal as of January 1, 2021, the country would have experienced two of the worst economic crises in its history in a space of 13 years.
It is possible that once the virus is truly beaten everyone rushes back out to spend and the economy enjoys a v-shaped recovery. That would not be my base case. Many people will have lost quite a lot of income in the intervening period. New hires will happen more slowly than jobs were lost. If a larger share of new unemployment were a result of furloughs rather than permanent layoffs that might not be the case, but America largely missed the opportunity to achieve that. Hiring will be slowed by the fact that many businesses will have closed, and new businesses cannot be started up en masse overnight. New business formation will be hampered by uncertainty about the outlook; no one wants to take an enormous personal financial risk only to have their hard work and investment destroyed almost immediately by a new round of lockdowns. There will be other drags on activity, too; state and local government cuts (on which more in a moment) happen on a lag. States will be firing people at just the time when we would like growth to be ramping back up. These problems can be addressed with policy; but to work, the policies would need to be massive and radical—the sorts of things that leave an indelible mark on society.
I do think countercyclical policy is likely to be better after the pandemic than it was after the global financial crisis, attitudinally if not in effectiveness. Central banks will do whatever they can, and depending on the outcome of November’s elections it is possible that fiscal policy will also be working to give the economy a boost. Of course, both fiscal and monetary policy began this crisis in a very unusual place. Interest rates at the beginning of the pandemic were well below the level of 2007. Central bank balance sheets are far larger than they were 15 years ago. The federal deficit was enormous before the crisis erupted. The Fed’s response to the crisis has already entailed some pretty radical policy steps, and by the end of the year its balance sheet might have grown to 50% to 100% of GDP: or who knows, even more. The federal budget deficit this year might reach 20% of GDP, which is the kind of thing you expect to see during a period of total war. We are facing either a slow and uncertain recovery or a trial-and-error process of radical economic policy intervention (or, possibly, both). This is not going to be easy.
That’s at the national level. What about those state and local governments? They will, in many cases, face budget crises that put the hardships of the Great Recession to shame. Some states and municipalities will face bankruptcy in the absence of simply enormous amounts of federal aid. The funding status of public universities could change dramatically. So might the operation of the social safety net, much of which runs, at present, through the states. I don’t know exactly what the outcome of the local government crunch will be, but the end result will be something fundamentally altered from the status quo ante.
Americans might not be particularly focused on the somewhat similar internal stresses placed on the European Union. Government budgets across the euro area are going to look very, very ugly when all of this is over. The European Central Bank can keep bond vigilantes at bay so long as it keeps buying bonds, which it will do so long as the politics of the euro area allow it. But they may not. Tensions are building over the issue of debt mutualisation via special “coronabonds”: to which the Germans and the Dutch are adamantly opposed. Governments are at odds over hoarding of critical supplies, over management of borders, over the worryingly authoritarian path followed by Poland and Hungary. Of course, it is true that a united Europe survived several near-death experiences in the aftermath of the global financial crisis, and perhaps that goes to show how resilient it really is. On the other hand, it very nearly didn’t survive those episodes, and this crisis will in some ways be more difficult to handle. Why should Americans care? Well, a world in which the EU fell apart would be one radically changed by the pandemic. It would be one which faced new threats and instabilities, and new obstacles to economic recovery around the world.
Then there is the emerging world. Many people seem to have been holding out hope that the pandemic would spare developing nations a hard hit, perhaps because the virus is less contagious in warmer climates. We have enough information now to know that developing countries will not be left untouched entirely. Lower incomes, poorer health, and less public-health capacity mean that any outbreak will do plenty of damage. But even those countries spared the worst of the pandemic itself will face a massive economic blow: thanks to a collapse in global output, tumbling commodity prices, and a sudden stop in capital flows. Government budgets across the developing world will be destroyed: and there, unfortunately, central banks mostly can’t fund massive government borrowing via money printing without touching off dangerously high inflation. Should Americans care? They should, about the human costs, certainly. But they should also be aware that emerging-world financial meltdowns, migrations, and geopolitical crises have a way of washing back up onto rich-world shores one way or another.
There are many different ways the next two years could go. The worst-case scenarios are too horrible to dwell on. By the same token, it is possible that a month from now the worst of the crisis will be behind us. But having the worst behind us does not mean that the road ahead of us is clear; the worst, remember, will include thousands of deaths each day and a nauseatingly rapid decline in economic activity. If people get that wrong—and lose patience with the need for continued restrictions and the slow pace of economic recovery—then the worst will not have been the worst after all. This virus is deadly and very contagious and at the end of the next month, if we are very lucky, the overwhelming majority of human beings on the planet will still have no immunity to it. There are worse positions to be in, but that’s still an incredibly dangerous situation.
Changing gears a bit: while I’m somewhat confident that public-health and macroeconomic risks will remain high over the next two years, I’m far less sure how this experience will change society. Will handshaking go away? Will we all wear masks all the time? I have no idea. I have begun to think, though, that this worldwide work-from-home experiment might prove more transformational than many people suspect. I’m not saying all office work will suddenly be done remotely and cities will cease to exist. I do think we may end up looking back on this experience as a turning point in the way many people work.
Of course there’s a case for skepticism about this. The technology to do what we’re doing now has been there for years. The return to making use of it is really high. The cost of both commercial and residential real estate in big cities, and superstar cities especially, has soared over the past few decades. Congestion on roads and transit has in many cases gotten worse. To operate a white-collar workplace filled with knowledge workers in a global city means paying vast sums for office space and a pretty stiff location premium to workers to offset high housing and commuting costs. If you could somehow reduce those costs, well, that would be highly advantageous. The fact that so much work is still done in offices suggests that the benefits of in-person work must be really large. And of course we can all think of ways in which in-person work makes a huge difference. Interactions with others are easier, more flexible, more spontaneous. Communication is more nuanced. This stuff really does matter.
Why might the pandemic produce a change? For one thing, firms hoping to get a new technology to work well for them must often engage in a period of investment in intangible capital—in know-how, essentially—to figure out how to get the most out of that new technology. You can’t just throw Slack and Zoom and Google Docs at a bunch of heterogeneous organizations and expect them all to make maximum effective use of them right away. People need to learn to use the tools. More importantly, organizations need to develop sets of practices and norms surrounding the use of technology to replicate the in-person productive processes they rely on.
That takes time! In habitual, in-person editorial meetings, participants all understand what information should be shared then and there and which can be communicated in some other way at some other time. Everyone knows the rules of engagement: when and how it is acceptable to interrupt or ask a question, when and how it is appropriate to express agreement or disagreement. It is easy to read social cues regarding what interventions in a discussion are inappropriate or when people are losing patience. There is all sorts of informal organizational structure which has evolved to enable certain kinds of information exchange. Making remote-work technology work means replicating all of that online, or finding appropriate substitutes. That takes a lot of trial and error, which can only be worked through over a period of weeks and months. Right now, there are lots and lots of firms and lots and lots of workers all going through this process, making investments in intangible capital which will change the balance of costs and benefits of remote-work relative to alternatives once this is all over.
But if getting remote-work right were simply a matter of time, and if the payoff to getting it right is indeed large, then surely a few bold firms would have taken the plunge before the pandemic and benefited from it handsomely, proving to others that the investment is worthwhile, right? Mightn’t this experience simply demonstrate to everyone that even after all the intangible investment remote work is still no match for an office setting? Possibly. But the other thing about this experience worth noting is the fact that everyone is forced to do it at once.
Remote-work will be a better fit for some organizations than others. If, during normal times, the firms that stand to benefit most from remote work do not happen to be the sort that are prepared to take on hare-brained experiments in search of large cost-reductions, then it could take something like this enforced experimentation to help lots of organizations realize it isn’t so bad after all. It’s much less risky to embrace the experiment when everyone is doing it, and much more important to fully commit to making it work, since the survival of your business might well depend on it. Clients who might otherwise say to hell with a firm that suddenly refuses to do things in person are more understanding now, and may at any rate lack in-person alternatives to run to if they aren’t. Once a customer has been retained through this transition, there may be much less reason to go back to the old way: particularly if some clients learn that they much prefer being able to do everything remotely. Gaps in knowledge-economy supply chains which hold up efforts to experiment with remote work are rapidly being filled in. And because the market for support services, innovations and technology tweaks which improve the remote-work experience is now massive, the pace at which remote-work tools get better is likely to rise.
There are admittedly some forces working against a broad change in work habits. The great work-from-home experiment is occurring while most schools are closed. Having the kids around can make remote-work more frustrating and less productive, and may mean that lots of people become less open to embracing it on an ongoing basis than they otherwise would be. People might also discover just how much they value in-person contact for reasons other than direct contributions of productivity. It’s nice to see people! Maybe we’ll be more willing than ever to put up with high rents and long commutes. It’s far from certain that the work-from-home revolution begins now, even if the odds of a transformation are rising.
On the other hand, it might not take much of a shift in habits to generate a big change in economic geography. The balance of costs and amenities in superstar cities, relative to thriving midsize metropolitan areas, appears to have eroded in recent years. Places like New York and Los Angeles, which experienced rapid population growth over the past couple of decades, have seen that growth level off and decline in recent years. The bars and restaurants and galleries in smaller cities are often pretty good these days (well, not *these* days, but you know what I mean) and you can get on the property ladder without having inherited a small fortune. Megacities are attractive places for households with two high-powered earners, since they offer a deep pool of potential employers across a number of different industries. But what if the share of such couples containing at least one member who can work remotely rises? Suddenly, moving becomes a much more realistic possibility for a lot of people.
To be clear, distance is not going to die. Cities are not going to go away. Urbanization is perhaps the most fundamental and persistent feature of economic modernity, and this pandemic isn’t going to change that. But patterns of settlement and economic activity do change over time. Some places struggle while others enjoy new life. It is just possible that this experience becomes the catalyst for an important structural shift in how and where people live and work.
Last week, I took a break from the column to contribute to our mega-briefing on the difficult choices faced by policymakers around the world. This week is spring break. The rest of my family gets a break from their online learning and meetings, and I’m taking a break from the column to join them in their exploration of new ways to entertain ourselves within the confines of our home and yard. At least the backdrop provided by nature is a nice one.