The financial wreckage that the COVID-19 crisis leaves behind will be devastating and long lasting. Already economists are debating whether the cure – the near destruction of the global economy – is worse than the illness. That debate will surely rage on for years.
As this is written in the Spring of 2019 the world is still on lockdown and the global economy is largely at a standstill. There is only speculation when about a “return to normalcy” might begin.
Very little is known about COVID-19. Exactly how it spreads, its contagion rate and cures are unknown. A vaccine may be as long as a year away.
Congress is passing one round of stimulus bills after another, now totaling about $5 trillion dollars. The national debt has increased by about 20%, accounting for 105% of current Gross Domestic Product (GDP) and the total will likely be much more.
In this article I will outline the major economic challenges we are facing and offer one possible solution.
But first a little history.
It’s easy to forget that the United States was the only industrialized country to survive World War Two unscathed.
The economies of Europe and Japan was almost totally destroyed.
Steel mills, railroads, bridges, ports – all the infrastructure needed to build and expand national economies were gone. In England rationing continued for five years after the war, while in central and eastern Europe refugee camps emerged.
Japan had entered the war after less than a century after it opened itself to the world and only a few decades into industrialization. Now that promising start had been destroyed and Japan became the first country to endure a nuclear attack.
The United States became the manufacturer to the world. Asia and Europe were building new economies that required massive amounts of raw materials and finished goods. With the Marshal Plan fully in place a long-term producer-consumer relationship guaranteed the global economic dominance of the United States.
This was the era of the “Steel Belt” that brought good paying jobs and middle-class status to hundreds of millions of Americans. Home ownership became synonymous with the American Dream. Diseases like polio and whooping cough were eradicated, air travel became routine, air conditioning opened the southwest deserts to development. African-American sharecroppers in the South left in droves for cities like Chicago and Detroit, bringing the blues with them that soon evolved into rock and roll.
The emergence of a youth culture was possible only because national wealth had increased to the point where children were no longer needed to work to help support families. They could now spend their time in leisure pursuits and extended years of education. Pop culture standards like rock and roll, youth-oriented movies and the car culture began. High schools became modernized, and college began to underpin movement into the middle class.
The early Baby Boom generation didn’t know it then, but they were witnessing the apogee of American wealth and culture as children, and would see its gradual decline as adults.
Robert J Gordon pegs 1970 as a turning point for the United States in his massive book The Rise and Fall of American Growth. At this time the economy began a slow decline. Imperceptibly at first, it ended with the 2008 banking crisis that ushered in a new kind of economy.
The central claim of Gordon’s book is that 19th and early 20th century discoveries and innovations had delivered all the value they could to the economy of the United States. Automobiles and airplanes, for example, achieved their biggest impacts on the economy, and after 1970 only became more refined without making dramatic economic contributions.
Gordon expands this argument to the entire industrial economy. Since about 1970 only incremental improvements in efficiency and productivity have affected the national economy.
In the following years the United States would face fluctuations in GDP, and increasingly frequent and severe recessions. In 2008 the last vestiges of the long boom that started in the 19th century ended and a new economy emerged.
After 2008 GDP never reached levels it routinely did prior to 2008.
Investopedia defines GDP as “the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of the country’s economic health.”
GDP is far more than a boring statistic confined to the “dismal science” of economics. It is a measure of the health, happiness and wellbeing of large groups of people.
Because it measures annual overall monetary value, we can say that it is a measure of the wealth of a country. Sometimes economists and social scientists divide GDP by the number of people in a country show average wealth. This is per capita GDP and is often used to compare individual wealth between countries. The higher the GDP the wealthier everyone is, on average.
In Enlightenment Now, Steven Pinker uses GDP to make qualitative judgments about the overall health and happiness of societies across the globe and through time. Here are what GDP measures, at least in his view:
Most obviously, GDP per capita correlates with longevity, health, and nutrition. Less obviously, it correlates with higher ethical values like peace, freedom, human rights, and tolerance. Richer countries, on average, fight fewer wars with each other, are less likely to be riven by civil wars, are more likely to become and stay democratic, and have greater respect for human rights (on average, that is; Arab oil states are rich but repressive). The citizens of richer countries have greater respect for “emancipative” or liberal values such as women’s equality, free speech, gay rights, participatory democracy, and protection of the environment. Not surprisingly, as countries get richer, they get happier; more surprisingly, as countries get richer they get smarter (Pinker 2018, 1848-1856).
From 1980 to 2000 annual GDP growth in the United States averaged 3.8%. From 2001 to 2019 it averaged only 2.0%, a decline of almost half. The days of economic growth of 3% or 4% are over.
But declining GDP is only one challenge we are facing. The other is national debt.
Earlier I mentioned that Congress is passing a series of stimulus packages, currently totaling about $5 trillion dollars. This money is intended to keep workers and businesses solvent until the country can go back to work and make money in the way it did in the past.
Where is this money coming from?
Out of thin air, basically.
When the government needs to borrow money, it sells bonds. Bonds are a debt instrument – certificates stating the holder will be paid the face price of the bond, plus interest at a later date. US Treasury bonds are in demand because the United States is considered the strongest and most reliable economy in the world. There is always a ready market for treasury bonds.
Our national debt has been skyrocketing since 1980. Now it is higher than ever and gets higher every time Congress passes a new stimulus bill.
Increased national debt has four major consequences:
- Lower per capita, or per person, wealth. GDP is the wealth we have; the national debt is the wealth we owe. Right now, the national debt is about 5% higher than GDP. We owe more than we have. We all become poorer, with all that entails.
- Government must pay higher interest on Treasury bonds. Bonds are traded in the bond market, and as confidence in the ability to repay bonds erodes, interest rates increase. That means it will take longer and cost more in taxes to retire the debt.
- Higher taxes and/or spending cuts are inevitable. In order to pay the interest on the debt taxes must be increased or services cut. Unless the economy suddenly becomes more efficient at creating wealth there is no other way.
- And, of course, high debt levels impede the ability to finance emergencies. The ability to cover costs of natural disasters, military action or another recession is compromised.
Last year the Government Accounting Office (GAO) warned Congress that debt levels were nearing the point of unsustainability. That means it may not be possible to pay interest on the debt. That’s what happened to Portugal, Italy, Greece and Spain following the near economic collapse in 2008. Their economies continue to stagnate under their debt load, even after contentious interventions from other European countries, and will probably continue for many years to come.
Before thinking about what will happen when the economy restarts, we need to think about where we are now, and how we got here. Let’s review the recovery from the 2008 Great Recession to get an idea of where we are and challenges of “Great Restart”.
During a recession people lose their jobs, work diminished hours, and compete for far fewer promotions tied to income gains. Buying drops off, consumers make do with what they have, and demand throughout the economy diminishes.
This decreases the need for workers, creating a cycle making the economic slowdown worse. The government may step in, borrow money and inject it into the economy in order to slow or reverse the cycle. That’s a stimulus.
When the economy begins to pick up, workers start making more money and economy wide demand picks up. Pent up demand – catching up on all those deferred repairs, replacements and upgrades and also buying big ticket items like new cars, and new houses – stimulates the economy in a “virtuous cycle” of earning, producing and buying.
A basic rule of supply and demand states that when demand increases, so does price. That’s inflation. A little inflation is a good thing because it shows that people are working, making money and buying new things.
But none of that happened after the 2008 reset.
That is because many traditional jobs never came back. As the economy slowly grew many jobs were simply eliminated.
In addition to other effects of the 2008 recession, no jobs were created during the entire first decade of the 21st century. Assuming that about 100,000 people enter the labor market every month the net job loss for the decade is about 1.2 million.
That’s how we got gig jobs – limited duration often part time employment lasting only as long as customer demand. Gig jobs generally do not pay very much and have few or no benefits compared to the same work done in a traditional setting. Uber is probably the best-known gig job, but many other kinds of gigs exist.
Higher education has moved largely to adjunct professors who work only when enough students sign up for classes. The explosion in blogging and web influencers are also example of gig work, as are platforms like Upwork and Fiverr. The collapse of the print media industry has driven writers to online gig work, notably blogs and independent news sites.
Many gig jobs are not counted as employment and they generate far less income than the jobs that existed prior to 2008. People may be working, but they are treading water, not accumulating wealth for retirement, improving their lifestyle or adding to economic growth.
This is why the unemployment rate is so low but at the same time does not produce enough demand to generate healthy inflation.
The median annual individual income has slowly increased since 2000 and in 2018 reached $33,000. The median is the midpoint in a distribution, meaning that half the people in the United States make less than $33,000 a year, and half make more.
Another consequence of the chaos of 2008 is a steadily increasing portion of the population leaving the labor market entirely. When that happens, they no longer meet any of the Bureau of Labor Statistics (BLS) criteria for having a job of any kind. This is fueling the expansion in disability claims, early retirement and the emergence of a “stealth economy”, largely in online services (Neuwirth 2011). The portion of the population in the traditional workforce now is less than when women were largely traditional homemakers in the early 1970’s.
Whole industries, such as restaurants, recreation and many retail outlets have already been wiped out. When the economy restarts, entire sectors will be left behind. They will either reinvent themselves to fit into post COVID-19 consumer preferences or disappear.
For example:
Can you imagine people standing cheek by jowl at TSA checkpoints waiting to board a sealed aluminum tube with a hundred others and breathe recycled air for a few hours?
Shopping in crowded malls? Going to the hairdresser? The gym?
Eating food from platters brought by a server walking across a restaurant full of people exhaling a cloud of germs and viruses?
How many will drop their kids off at a day care center full of strangers’ kids from all over town? What about sending kids to public schools after they’ve spent months adjusting to online learning?
Japanese students are already refusing to enter classrooms, preferring to continue online studies at home.
Think about sharing keyboards in a post COVID-19 world.
Before the COVID-19 crisis, about 14% of college students were enrolled in full time online programs. The University of Phoenix sold their real estate and made the move to offering exclusively online education a year ago. Currently, 83% of families in home quarantine report their K-12 children are continuing their education online.
The technology already exists and participation in online learning has been growing. How much faster it will grow is anyone’s guess, but there’s no doubt COVID-19 will give it a huge boost.
After a few months of telecommuting business owners will start to think about whether all the expensive office real estate they pay for is really worth it. Especially in light of the expansion of remote work surveillance software that’s now selling like hot dogs at a baseball stadium.
After enjoying the benefits of telecommuting workers will eagerly make the move. A recent Gallup poll showed that about 59% of respondents would just as soon continue working remotely as go back to offices full of people.
We’ve been on the cusp of widespread online learning and telecommuting for years. The business need for increased efficiency might be the push we need to go online. Wealth saved is wealth created that can increase GDP and reduce the national debt
Imagine the wealth that could be created simply by using home computers instead of driving to work and school to use computers there. We would still need cars, but we certainly wouldn’t need to drive them as much. That would lower dependence on oil, both foreign and domestic, save lives, reduce crippling injuries and do wonders for the environment and our health – all of which saves money and creates wealth.
If public school made the shift to online education there would be no need for expensive buildings or buses. School shootings would cease to be a parent’s nightmare.
None of this would happen overnight, but by 2030 we could be living in a transformed world.
The post COVID-19 world is going to be very different from the pre-2008 world. The decade between the Great Recession and the economic destruction from COVID-19 will probably be seen as a time of adjustment and preparation for even greater changes, new opportunities and different ideas. Again, there will be no recovery, but rather the slow evolution into a new economy.
If Robert Gordon is right and the inventions of the Industrial Revolution have played themselves out in the early 21st century, we need an entirely new kind of technology to exploit. Something that is not mechanical, like cars and airplanes, and not computational, like computers and the internet – although present high tech might be a bridge to get us to where we need to go. We need an economy based on something we can barely imagine now. What that might be I have no idea, but there are glimmers of intriguing possibilities.
We’ll get into the mind-bending possibilities in a minute, but first let’s examine an example of how quickly change can occur.
There were very few roads suitable for automobiles in 1900. By 1916, there were 287,047 miles of surfaced roads. The event that caused this explosion of paving was the explosion of automobile production. Only about 2500 cars were built in 1899. They were curious contraptions of little practical value. However, by 1919 auto production passed the one million mark.
Consider what was needed to accommodate that sort of growth. Oil refineries, concrete and asphalt production, rail lines and rolling stock connecting manufactures, suppliers, extraction industries, to just scratch the surface. All these technologies were brand new at that time, and represented the cutting edge of chemistry, physics, metallurgy, and organizational theory. Each created a new economic sector.
At the same time, similar transformations were occurring in the electrification of the United States, our educational system and management practices. The Industrial Economy was nearing its peak.
Most importantly for this discussion, all these industries had to move forward in lockstep. Each depended on the others to develop technologies needed for advancement. There was no point in manufacturing cars unless there were roads for them to travel and gas for them to burn. Road building was dependent on refinery technology and refinement was dependent on oil production. Each industry created demand for the others. None of these industries could move ahead without the others also expanding.
And they did, and all in the space of just 20 years or so an entirely new economic sector was created.
There is no reason a space-based economy can’t take the same path.
Several asteroid mining companies formed in the early 21st century.
The most prominent of them, Planetary Resources and Deep Space Industries, made quite a splash but could not find a profit and were bought by large aerospace companies. Both companies made contributions to engineering and conceptual challenges. It appears they were bought not for their physical assets, but for their intellectual properties.
The main challenge they could not overcome had little to do with identifying asteroids with profitable materials to extract, or even the extraction process itself. Using optical telescopes Planetary Resources identified several candidate asteroids. Extraction would be done with earthly extremophiles genetically modified to eat asteroid materials and excrete ore.
So far, so good, but the real problem was what to do next.
The ore has to go somewhere for refinement, but where to build the refinery? The Moon? A space-based facility? Ferry it back to earth? These alternatives might be technically attainable, but are tremendously expensive.
There is little point to extracting ore with no place to refine it. But it makes little sense to build a phenomenally expensive refinery without the ore to process and sell. It’s a chicken or egg problem; mining asteroids requires constructing both the chicken and the egg simultaneously before eggs can start rolling. Much like the early 20th century automotive industry, everything has to simultaneously evolve and support each other.
There is a lesson to be learned from the California and Yukon gold rushes of the 19th century. Gold miners rarely made much money, but they sparked the creation of entirely new economic sectors from which millions of people benefited.
When miners first showed up, they needed basic supplies. Food, tools, pack animals – all the things need to dig ore out of the earth. It was the small businesses supplying these materials that initially became rich from the influx of miners.
But it didn’t stop there.
Individual miners might have been able to extract ore, but they lacked the resources to build the machines to refine the ore. That’s where well financed mining companies came in. They built and operated the machinery needed to turn gold and silver into highly refined metals that could be transported and sold.
The mining companies financed the roads bridges and railways built by road building and railway companies.
But there’s more…
The people following the miners building this infrastructure needed food and shelter, leading to the birth of construction industries, agriculture industries, fishing industries, many of them still operating to this day.
A space economy would likely follow the same path. The road to riches is not in extracting ore form the Moon, Mars or asteroids, but in building the ancillary goods and services needed to lay the foundations for a space economy.
The birth of the railroad industry also holds lessons about the evolution of industries built on new technologies.
Steam powered rail transportation did not suddenly spring onto life and expand across the country.
Far from it.
In 1804 the first locomotive pulled a car along a set of tracks in Wales. But it took decades to overcome the technical challenges of commercial freight hauling. That happened in 1830 when rail service connecting Liverpool and Manchester was established (Gordon 2004).
The first commercial railroads in the United States used cars pulled by horses. In 1828 the “Tom Thumb”, often credited as the first commercial steam powered locomotive, lost a race to a horse, and financial backers stepped away (Schweikart 2000).
In 1830 the South Carolina Canal and Railroad Company hauled 140 passengers a short distance using the first commercial locomotive made entirely in America. At about the same time Matthias Baldwin, destined to be the first locomotive manufacturing magnate, built a steam powered locomotive — a boiler built on wooden frames, using wooden wheels that carried only four passengers. In 1832 a railroad company contracted with him to build a full-scale locomotive, still using a wood frame and wheels (Schweikart 2000).
It took a decade of fits and starts before rail transportation started to become commercially viable. In 1842 one of the first successful rail business ventures involved transporting milk from farms into New York City.
At that time milk in the city was called “swill milk”. Produced by local brewers with excess grain, the milk was often tainted with diseases like cholera and tuberculosis and adulterated with chalk to increase its volume. Fresh milk from the countryside became an instant commercial success (Schweikart 2000).
With all that in mind, it should not come as a surprise, then to know that the companies buying Planetary Resources and Deep Space Industries, (Consensys and Bradford Space), are focusing on supplying ancillary goods and services, not mining. The intellectual assets of Planetary Resources and Deep Space Industries are preserved deep on a secure server waiting for the day they can be incorporated into a business model.
Already we are making the first baby steps into a space-based economy, with Virgin Galactic, Space X and Blue Origin. We are making the first baby steps into a space-based economy, and these early steps will contribute to its birth.
That’s why the recent executive order announcing the right of the United States to mine space resources – minerals on the Moon, Mars and asteroids – is significant.
Maybe that is the economy we are fated to build and our current economic morass is an interlude separating a 19th century industrial economy and a 21st century space-based economy. Imagine being alive to see the end of one and the beginning of another as humanity begins the transition to a space faring nation.
Towing asteroids into lunar-earth orbit is no more far-fetched that what has already happened in the recent past. Mining asteroids, the Moon or Mars will allow us to break free from 19th century technologies and build a space-based economy. A foundation our children and grandchildren can build upon for a 22nd century economy.
References
Gordon, J. S. (2004). An empire of wealth: The epic history of American economic power (1st ed.). New York: HarperCollins
Gordon, R. J. (2016). The rise and fall of American growth: The U.S. standard of living since the Civil War. Princeton: Princeton University Press.
Neuwirth, R. (2011). Stealth of nations: The global rise of the informal economy. New York: Pantheon Books.
Pinker, S. (2018). Enlightenment Now: The Case for Reason, Science, Humanism, and Progress. New York, New York: Viking, an imprint of Penguin Random House LLC. (Kindle Locations 1848-1856). Kindle Edition.
Schweikart, L. (2000). The entrepreneurial adventure: A history of business in the United States. Fort Worth: Harcourt College Publishers.
