Followed by social unrest........

After the pandemic, here comes the crisis

Historically, outbreaks have been followed by social unrest.

BY SARAH WHEATON

When it comes to the economics of COVID-19, the worst symptoms may not appear until the virus has gone into remission.

Across Europe, the pandemic and its lockdowns accelerated trends like automation and economic inequality. At the same time, they put political unrest mostly into a sort of deep freeze, while leaving the underlying tensions simmering.

Emergency paycheck replacements, eviction bans, loan deferrals — these temporary measures stanched some of the bleeding caused by the biggest global shock since World War II. But the bills are on track to come due just as aid expires, meaning “recovery summer” risks wilting into an extended winter marked by a widening income gap and social discord.

As economies emerge from the pandemic, policymakers face a brutal choice: Alleviate the suffering of those most affected by the pandemic — or use the unprecedented flow of cash for transformation to a greener, geekier future.

If the economic winter bites, as many economists expect, the public will weigh in on their choices — if not at the polls, then on the streets. Civil unrest has increased in the wake of other recent pandemics, a recent International Monetary Fund Analysis found, peaking an average of two years after the health threat passes.

This article is the first in a series examining how the coronavirus has changed the world and what we can expect on the long road to recovery. This week, we’re looking at how the pandemic threatens to widen inequality, with special focuses on the hard-hit restaurant industry and the coronavirus generation just now graduating into the workforce.

When it comes to the economics of COVID-19, the worst symptoms may not appear until the virus has gone into remission

Deep freeze

During the pandemic, economic inequality was the source of a lot of hand-wringing, but not much action. In Europe, popular uprisings like France’s Yellow Jackets — spurred by President Emmanuel Macron’s green plan to reduce gas consumption by taxing it — and public sector strikes against labor reforms in Greece fell silent.

Likewise, a look at the top-line numbers makes it seem like things aren’t so bad. Bankruptcies, for example, plummeted at the beginning of the pandemic and are still well below their rate at the end of 2019, according to Eurostat. Some studies suggest the wage gap also decreased during the pandemic.

It’s all a mirage.

Fear of contagion and emergency measures allowing authorities to restrict citizens’ movements ended the street protests, economists say — but not the grievances motivating them. Those are only on track to get worse: More than 40 percent of respondents in an OECD survey of 25,000 in 25 countries experienced some sort of job-related disruption due to the coronavirus, including pay reductions and furloughs.

For now, however, emergency subsidies and bankruptcy protections have been hiding the real cost of the pandemic, which shut down predominantly low-skilled labor in service and manufacturing sectors.

“When the schemes end, then we’ll see the real impact,” said José García-Montalvo, research professor at the Barcelona Graduate School of Economics. In Spain, income inequality spiked during the first six weeks of lockdowns last spring, as tourism disappeared. Madrid’s emergency rescue plan gave furloughed workers some 70 percent of their previous income, reducing the gap, though not to previous levels.

The government is in discussions to continue the assistance until September, but trouble could still be on the way, depending on how many of those 600,000 furloughed workers are ultimately laid off. “We haven’t seen the last word of this crisis,” Montalvo said.

Conversely, 2020 was kind to the bank accounts of wealthy people who could keep working, but didn’t have as much to spend their wages on. According to one estimate, financial wealth in France is €50 billion higher than it would have been without the pandemic. About 50 percent of that excess cash went the top 10 percent. For the poorest 10 percent, debt increased.

As bad as COVID-19 and its 3.4 million deaths worldwide have been, it’s not the Black Death. Killing around half of Europe’s population in the 14th century had the silver lining of wiping out elites’ wealth and while slashing the availability of unskilled labor needed to work the land — thus (eventually) reducing inequality.

Instead, the coronavirus pandemic accelerated demand for high-skilled labor, and that’s in short supply. In the Belgian region of Flanders, only about 74 percent of adults are employed. Nonetheless, two-thirds of the 600 companies surveyed by the business association Voka in May said they were struggling to find suitable candidates. Voka called for governments to provide more training and incentives.

The combination of perceived inequality and loss of income drive grievance and social unrest, said Rui Xu, an economist at the IMF, who analyzed the past pandemics. Then the social unrest itself takes an economic toll. “So, once you have the cycle going, the effect will last longer than just one or two years,” said Xu.

Her analysis warned of a “vicious cycle.” Looking at the aftereffects of other recent pandemics — including SARS, H1N1, and Zika — it found that economic output didn’t just tank; it remained down by about 10 percent some five years later.

Xu and her co-author, Tahsin Saadi Sedik, saw signs that policy interventions can stave off some of this unrest, but it’s not totally clear which work best. Lawmakers in Brussels and the capitals may have to pull the trigger on a plan before the IMF’s database offers answers.

Compounding factors

In addition to historical precedent, there are plenty of reasons this pandemic could countries under unprecedented pressure.

As the coronavirus paralyzed society, it sped up the disruptive trends of automation and digitization. Robots showed they have yet another advantage over their error-prone, paycheck-demanding human counterparts: They’re immune to viruses (at least the biological sort).

Businesses preparing for the next pandemic are making long-term investments in machines for the factory floor, while digital meeting services will preserve jobs for their white-collar workers. An analysis in Italy — where an estimated 1 to 7 percent embraced telework before the country was devastated by the pandemic — found the “new normal” of home offices would benefit “male, older, high-educated, and high-paid employees.”

For students, the effects of remote learning are also uneven. Early childhood education — crucial for developing the social skills key to mobility — isn’t easily replicated over Zoom. Further, a study in Germany found that kids spent only about half as much time each day actually learning when classes went online — kids who already had low test scores lost half an hour more on average than high performers.

The fact that COVID-19 hit poor people harder will make their economic recovery harder, too. People living in cramped spaces, who had to show up in person for work, were more prone to catch the virus in the first place, and have preexisting conditions that could make the illness more serious.

Socioeconomic status is also linked to attitudes toward vaccines, and the ability to get them: A U.K. survey of working-age adults found vaccine hesitancy rates of 12-14 percent among those making less than £30,000 per year, compared with just 5 percent for those making more than £40,000 annually.

The lockdowns also took a heavier toll on mental health. A study in Austria after just four weeks of lockdowns, things like depression and insomnia were up for everyone, but adults under 35, women, the poor and the unemployed were hit especially hard. This can “compound their difficulties of searching for a job,” notes the Harvard economist Stefanie Stantcheva.

Once in a generation

The aftereffects of the pandemic could have as much an effect on policy as the COVID-19 itself.

Despite the vaunted social safety nets of European welfare states, protections aren’t actually that strong: About two-thirds of people who lost jobs prior to COVID-19 didn’t actually qualify for unemployment benefits, said Mark Pearson, the OECD’s deputy director of employment, labor and social affairs, citing data from 24 countries, predominantly in Europe.

Europeans have taken note. While the 2008 financial crisis didn’t do much to change citizens’ expectations, as far as government protections from financial uncertainty, the far-reaching pandemic has: On average, 68 percent of respondents to the OECD survey want to see the state do more.

“This has been the biggest shock to our societies and our economies since the Second World War,” Pearson said. That could mean that policymakers could soon be facing demands to do far more. “The response to the Second World War was the welfare state.”

Unlike during the last crisis, when governments tended to tighten purse strings, this time they turned on the taps — as evidenced by the European Union’s €750 billion recovery fund, and Washington’s €900 billion stimulus, as well as the more than €3 trillion spent by national governments since the pandemic began.

"This is not the time to take money from citizens, but to give it,” said Mario Draghi, the former European Central Bank president now leading the Italian government, announcing a new €40 billion aid package last month.

In Europe however, particularly in Brussels, much of that money has been earmarked not for immediate relief but for efforts that will green the economy and prepare it for the digital age.

Politicians are usually criticized for short-sightedness. But in using the post-COVID stimulus as a tool to transform the economy, Brussels risks sacrificing the present for the future — and potentially sparking backlash.

The recovery package is a “once in a generation opportunity … to try and reshape your economic structure,” Pearson said, and shifting to a green economy is imperative. “It’s nevertheless not going to be an enormous source of jobs.”

He added, “It’s a genuine dilemma.”