Last week the stock of economists went up a notch when U.S. President Donald Trump explained why he doesn’t listen to economists: “I know a lot about economists and the answer is they have no idea… I think I have as good of an idea as anybody.”
When you look at all of the other experts in public health that the president also feels have no idea, economists are in esteemed company. That means that most of Trump’s ideas about trade and the economy which have been panned by economists now can be seen as ranking up there with his thoughts on dealing with the coronavirus with Lysol and bleach.
I have been asked many times lately about what’s going to happen in our economy after the COVID-19 pandemic and I have to say that in this case, Trump is not wrong – economists have no idea.
But just because we can’t predict the future doesn’t mean we don’t have some suggestions for what to think about as the period of social distancing and economic shutdown eases up.
It’s only been about six weeks since the start of the social lockdown to deal with the coronavirus. Economists correctly predicted that the lockdown would dramatically affect the supply side of many sectors of our economy, but that wasn’t too hard a call to make. While there is no clear end to the self-imposed economic disruption, in New Brunswick that situation is easing up and if all goes well in terms of no outbreaks of the virus we can expect some progress to a full reopening of the economy in the next 12 to 24 months. Our prime minister has declared that a full return to normal won’t happen until there is a vaccine for the virus or perhaps a treatment, but if history is a guide, that is a ways off – and possibly no longer necessary by the time it arrives.
Early on in the pandemic as public health strategies shut down much of the economy, and as global supply chains were disrupted, economists predicted that so long as the economic disruption of the pandemic was not “long lasting,” the economy would rebound. The idea was that households and businesses would remain largely intact financially so spending, investment and trade would return to pre-COVID-19 levels. With a largely supply side disruption to the economy, the main concern was how businesses could make up the revenue missed during the shutdown.
But the longer the pandemic supply side disruption lasts at home and abroad, we move into an uncertainty over a bigger problem which is the demand side of the economy. How quickly will export markets rebound? How much spending can households do with reduced income and likely reduced access to credit? What if it takes a decade or more, like in the 1930s, for demand to recover?
Even though we really haven’t been disrupted for that long, many economists are calling for radical changes to our economy and society. For example, the Conference Board of Canada wrote this week that “Even as cases of COVID-19 start to decline, containment measures could persist as governments work to avoid new outbreaks. The severity of disruptions has caused governments, businesses, and consumers to rethink the way they do business, both now and into the future.”
After only six weeks we are now prepared to consider changes that have been proposed and rejected for decades like basic income, virtual doctor’s appointments, greater powers of government to open and close borders and limit our freedoms, and not let clearly sick and contagious people get on crowded airplanes like my Air Canada seatmate did only eight weeks ago.
If earlier pandemics like SARS or H1N1 are a guide, then it is not clear to me that we will fundamentally change how we live and do business in Canada. But we will likely have a prolonged period where we drift back toward our old ways. So I guess economists and others see the opportunity to do things differently after COVID-19 as a “silver lining thing,” or more cynically, a “don’t let a good crisis go to waste” thing.
Economists predicting emerging opportunities is best understood with the old joke where a rich man looks at an economist like me and says “if you’re so smart, then why aren’t you rich?” Rather than using the snide comeback, “If you’re so rich then why aren’t you smart?” my short answer is that the trends and directions that we have some confidence in predicting aren’t that useful for making money. There is a lot of randomness in the world, so luck plays a big part in getting rich. Courage and ability to respond to an unexpected bounce that requires a “change in plans” also help.
The trend an economist predicts may either offset a bad bounce (meaning you make no money but stay in business) or it may reinforce a good bounce – and you make a lot of money. Either way, even if an economist guessed correctly, the predicted trend doesn’t determine if people got rich – the ability of people to adjust to the bounce did.
So what new opportunities may emerge for New Brunswick from COVID-19? In the nearer term, after the pandemic, the cost of everything will be higher and the demand for everything will be lower. Historically, these are the conditions that triggered the innovations that allowed us to get so rich today. When the cost of doing anything will be higher and the price received will be lower, innovation will be what drives down cost, or raises productivity, which are sources of competitive advantage. In the longer term, economic recovery and success will likely come from figuring out how to lower the cost of doing things while keeping the world safe. Whether these innovations are developed here, or imported, will depend on the health of our entrepreneurial ecosystem.
Higher costs of doing things and producing things will be most apparent post-COVID-19 where there is reliance on labour in dated, cramped facilities using older, but functional, machinery and equipment. In economies where this is the case, like New Brunswick, the competitiveness of our producers will fall. Given the near-term contraction in global demand, it is expected that industries will concentrate. That means competitive enterprises get larger, while less adaptable producers shrink or close. I am fairly confident about this trend since it has been a chronic challenge for our province and the wider northeast region since the early 2000s, if not longer. That means that competitiveness and economic growth will be a product of modernizing our industries with increased digitalization and automation of production. New Brunswick’s reliance on people working in close proximity in older buildings will be too risky and too costly with the post-COVID-19 workplace safety and public health regulation (see the Cargill meat plant in Alberta).
Many economists believe that COVID-19 disruption to international supply chains for producers will result in a re-regionalization of supply chains. In other words, reliance on low cost, but risky suppliers in China will give way to not-so-low-cost, but more secure sources of supply in North America. New Brunswick’s economy should see an opportunity to capture some of this post-COVID-19 contestable market share. But the risk is that our producers won’t be competitive against producers in other provinces and U.S. states who are better positioned to scale, modernize and find ways to sell and distribute their products and services.
For the province to gain, we need producers who are capable and enabled to adapt. Economists in the U.S. see larger, export-oriented producers as most likely to succeed post-COVID-19 with the right regulatory and business climate. We have many of those producers in New Brunswick but they are not typically the government’s preferred target for industrial growth since 2008.
Sometimes it is easy for economists like me to make predictions and recommend what government and its voters need to think about. And COVID-19 is one of those times. The pandemic has not created new problems for the New Brunswick economy. COVID-19 has just more clearly exposed the economic risks that economists like me have been talking about for a while. The long-term solutions for growing the New Brunswick economy haven’t changed with COVID-19. What has changed is the province’s ability to sustain its standard of living if we continue to ignore those solutions.
Herb Emery is a Brunswick News columnist and Vaughan Chair of Regional Economics at the University of New Brunswick.
The JDI Roundtable on Manufacturing Competitiveness in New Brunswick is an independent research program made possible through the generosity of J.D. Irving, Ltd. The funding supports arms-length research conducted at UNB.
