Reopen Canada or rebuild it?
As governments gradually remove most public health restrictions, the question needs to be asked: Are we reopening the Canadian economy or rebuilding it? This is not just a matter of semantics. Whether the damage done to the economy is transitory or structural has important implications for businesses and governments.
The idea that the economy only needs the green light to reopen implies few scars remain from last year’s severe recession. This was the premise of most government policy: send cheques to keep people in place as their work disappears and then cross your fingers and hope that somehow things right themselves. This approach seems vindicated by the discovery and distribution of vaccines, without which governments had no realistic plan for reopening the economy.
Notwithstanding the unprecedented harshness of the 2020 recession, some of the most talked-about structural impacts never happened. Despite all the hand-wringing about the pandemic’s effect on working women and youths, the biggest long-term impact on the labour market turned out to be the accelerated retirement of older workers. So far, the widely predicted tsunami of foreclosures and personal and business bankruptcies has not materialized. It will be crucial for the reopening versus rebuilding debate to see whether bankruptcies and foreclosures do spike once governments end their aid programs.
The pandemic clearly did have some structural impacts. Industries providing face-to-face services currently confront two big challenges. One is that demand has been slow to recover and, in some instances, may take years to return to pre-pandemic levels. This shift is already evident in the rising share of unemployment that is long term, even as overall joblessness declines. Many services workers left their industry, either retiring or shifting to more stable occupations.
The second big challenge for service industries is that labour shortages will eventually raise labour costs markedly, potentially changing the business model of many firms providing low-cost services. It is an open question whether, after years of enjoying low-cost meals and long-term care for the elderly, Canadians will be willing to pay substantially more. If they don’t, many businesses won’t survive.
The pandemic accelerated other changes, notably the adoption of new technologies and telework. The advent of the virtual workplace combined with soaring house prices to hasten migration to suburbs and rural areas. This shift means rebuilding is not taking the form that urban-fixated government planners have always hoped for. Digitization and working from homes in the country helped boost commodity prices — one reason why the natural resource sector is leading the recovery, along with housing. Demand for vehicles is so strong and supply so constrained by microchip shortages that autos will remain in short supply until well into next year. Moving out of downtown means recent multi-billion investments in mass transit, not oil and gas, are more at risk of becoming “stranded” assets — the exact opposite of the narrative popularized by environmentalists.
Another long-term impact of the pandemic was widening inequality of both incomes and wealth. Only the effect on wealth inequality is likely to persist, however. It is well-documented that lower-paid workers in services initially bore the brunt of pandemic job loss but the impact on wage rates is rapidly dissipating. On the other hand, the boost to asset prices from record low interest rates and central bank asset purchases is showing few signs of reversing.
The pandemic’s long-term impact on productivity is unclear, even putting aside the completely unknown effect on childhood development. Historically, a major reason for urbanization was the much higher productivity of cities, which greatly facilitate the exchange of information and ideas. Will the move away from cities lower productivity? In the short term, productivity has increased because of telework and reduced commuting. While many employees want to continue working from home at least parttime, most employers prefer a return to the workplace, where it is easier to monitor productivity and build and reinforce corporate culture. The outcome of this tussle between employers and employees will have major implications for everything from productivity to energy demand and inflation.
The biggest question is whether the recent surge in prices is temporary or signals a new trend. Central bankers profess no concern about inflation. Former Bank of Canada Governor Steve Poloz claims recent price hikes prove how successful policy was in stoking the recovery and is confident central banks will soon stop funding government debt. It is encouraging that the underlying trend of wages has slowed to an annual rate of just 2.0 per cent following a jump early in the pandemic. Other measures of labour market conditions, notably job turnover, are returning to normal levels.
The fourth wave of the virus in the U.S. and parts of Canada suggests hopes for a decisive end to the pandemic are an illusion encouraged by politicians and public health authorities who refuse to speak frankly to the public — thus confirming Thomas Sowell’s aphorism “When you want to help people, you tell them the truth. When you want to help yourself, you tell them what they want to hear.”
Unfortunately, clean breaks are not how life usually works. Rather than coming to a definitive end, the pandemic probably will wind down in a messy, prolonged and inconclusive manner, like history’s many wars in Afghanistan. A drawn-out pandemic gives more time for changes to install themselves permanently. Once you move to a house in the country, buy a car instead of a subway pass and take a job in another industry, it is hard to reverse course.
THE PANDEMIC CLEARLY DID HAVE SOME STRUCTURAL IMPACTS.