Why COVID-19 Didn’t Cause Another Massive Economic Recession
Lockdowns all over the country, rampant unemployment, and record-high novel coronavirus cases.
The rapid spread of the Coronavirus and the ensuing lockdown, caused a dramatic drop in consumer mobility and economic activity however, most industries saw their prices return to pre-pandemic levels within a few short months. How did this international catastrophe that is actively disrupting all of our personal lives NOT cause an economic disruption of equal magnitude?
You might argue that it did cause such an economic disruption and I’d agree with you… if you had been exclusively talking about the Crude Oil & Gasoline Industry (see Figure 1 below). Otherwise, markets recovered remarkably quickly.
The COVID-19 outbreak has taught us two distinct and noteworthy lessons which I will be expanding on further below: (1) wealth disparities across the world andes pecially in America are expanding, and (2) health emergencies disproportionately affect low-income communities.
Rampant and increasing wealth inequality continues to hurt the middle and lower classes, amplified by the effects of the pandemic
Humans are incredibly adaptive creatures — most major operational functions of business have already adapted to the restrictions created by the pandemic.
Figure 1: Max Drawdown of Various Industry Indices
How Did the Economy Recover So Quickly?
The US unemployment rate is still high at 6.9% in October¹, novel coronavirus cases are hitting all-time highs, and cities all across the country are shutting down to prevent the spread. So what gives? Despite the grim picture painted by statistics, the economy appears to continue on an unerring trajectory upward (Figure 2 = major market indices graph).
The answer to this question, while it does perhaps instill us with some confidence in the health of the United States economy, it also shines a light on a disheartening truth that most of us are all-too-familiar with. I’m talking, of course, about wealth distribution and inequality.
“Wealth inequality in the United States is high and has increased sharply in recent decades. This increase — alongside a parallel increase in income inequality — has spurred increased attention to the implications of inequality for living standards” — Leiserson et. al
Another Reminder of Wealth Inequality
The wealthiest 1% of families in the United States hold 40% of all wealth while the bottom 90% hold less than a quarter of all wealth². While nearly 23 million Americans are out of work and hundreds of thousands are getting sick, the vast majority of these Americans belong to bottom 90% of the population.
Poor communities, most notably those composed of ethnic and racial minorities, have been disproportionately affected by the COVID pandemic.
Latinx and Black communities continue to take the brunt of the negative financial impact of the pandemic and are more likely to suffer adverse health effects from the virus³.
Although the US and global economy is a complicated beast with many intricacies that most could not even feign to wholly grasp, Occam’s Razor reminds us to not ignore the simple data staring us in the face: the rich are getting richer and the poor are getting poorer.
Figure 2: Market Performance since outbreak
The economy continues to advance as the poor masses suffer because their success is only a tiny component of the overall success of the economy.
The economy ‘cares’ in proportion to the amount of money you contribute. Poor people, by definition, although comprising the majority of the population, comprise very little of the total wealth held. The sad fact is that a country’s economy (specifically the United States) is no longer an indicator of its people’s overall well-being.
As wealth disparities increase and wealth distribution becomes even more intensely skewed, this fact will become more and more apparent — even more apparent than it has become over the course of the Coronavirus pandemic.
Humans and their knack for Adaptation
Masks, cohorts, quarantines, prescheduling are the status quo now. And that’s amazing. We’ve all realized that all these things are essential elements to the COVID curve-flattening roadmap. Of course, humans are creatures of habit first so these changes were abrupt and discomforting at first but it’s amazing to see how we as a global society have been able to adapt our lifelong habits to survive in a post-outbreak world.
Most businesses have returned to work or are working online, schools have done the same, and people are generally going about their regular lives — save for the masks and hand sanitizer on your hip. I have some reservations about how our government dealt with the whole process however that is another can of worms.
How was this recession different than the 2008 GFC?
The 2008 Global Finance Crisis, by stark comparison, was such a crippling blow to the economy because (well, for a lot of reasons but we won’t go into it) the market that propped up the faulty AAA-rated bonds was one that the rich is and will always be significantly invested in — housing and real estate. The rest of the economy came tumbling down like house cards it had become.
While everyone in the United States — and the world- has felt the effects of the COVID-19 pandemic in some capacity, no one has felt its effects greater than the poor. Meanwhile, the Bourgeoisie seem to have walked away — unscathed.
You can see the data and code used to create the graphs I used above on my Github repo:
The Silver Lining:
So a deadly virus is rampaging across the globe while the rich sit in their ivory towers, cackling and counting their spoils. What hope is there for the common man? What’s the silver lining of this grim caricature? Well, frankly you’re looking at it.
Free and widespread distribution of information and education is the single most important element of the rightly-labeled information age we live in. Websites like Medium, Youtube, Reddit, Github, while some of them are oft referred to as leisure sites that provide a recreational respite, they serve a much more useful purpose: education and motivation.
This pandemic may be separating us and pushing us back into our homes, but the internet provides us a medium to connect with each other and gives us tools to create a better future for ourselves and our children.