The modern economy has been immune to infectious disease—until now. Epidemics in the modern world have ruined hopes, debilitated bodies, and claimed tens of millions of lives. This the first epidemic in American history that has also caused an economic crisis. Between April and June, about $2 trillion of economic activity in the United States came to a halt. Adjusting for changes in prices, that was nearly one tenth of gross domestic product. Even though public-health authorities and ordinary people took similar steps to stop past epidemics from spreading, none had remotely comparable effects on the economy—not cholera, which struck repeatedly in the 19th century; not the fearsome bubonic plague, which visited San Francisco in 1900; not even the so-called “Spanish” influenza that arrived in the United States in 1918 and killed tens of millions internationally.
What has made this pandemic unique is that for the first time, consumers worldwide can afford to spend a significant share of their incomes on non-essential goods and services. Much of their consumption has become optional, and rather than risking death to buy a Frappuccino, they’ve chosen to stay home. Others would like to go out, but public-health authorities have ordered non-essential businesses to close. Because the discretionary share of consumption has expanded, the choices about non-essential business that governments and individual consumers make in response to pandemic disease have become an economic problem.
The shift in the makeup of economic activity is due to decades of transformative economic growth. Previous epidemics did not cause economic crises because most consumers were poor by today’s standards, and their discretionary spending was minimal. The overwhelming demand for necessities such as food and clothing, which neither households nor governments could restrict in the interest of public health, kept the economy going. Today’s economy depends on a thousand luxuries large and small, from overpriced coffee to air travel, and these luxuries are what many consumers are now giving up. Willingly or not, they are saving instead of spending. Extreme savings rates are a defining feature of the available data on the coronavirus economy.
The public-health crisis is the result of a novel pathogenic coronavirus. But the economic crisis is a result of our affluence. Growth has created both extraordinary prosperity, and previously unknown risks.
The economy’s historically atypical response to the coronavirus is just one more piece of evidence that growth has altered the mechanics of the economy in ways that experts do not yet completely understand. After all, the pandemic has only accelerated the 21st century’s puzzling economic trends: excess savings; low interest rates; falling prices; and mass unemployment— all despite rising incomes. Having satisfied all their essential and most of their non-essential needs, consumers worldwide were saving more of total income even before the outbreak. And long after the pandemic has abated, the coronavirus economy will in important respects resemble the economy of the future—if policymakers allow these trends to continue.
For now, we can still hope that the current recession is just a weird and awful experience that none of us will have to go through again, rather than a harbinger of capitalism’s fate. But before hazarding any predictions, it’s worth taking a careful look at how we got here.
This winter, when economists and journalists were first coming to terms with the pandemic, most were forecasting relatively modest, short-term costs. And there was reason to expect those costs to be balanced out in the long term by faster increases in wages and incomes.
Many experts predicted what is technically called a supply-side recession. The phrase means that the supply of goods and services throughout the economy is interrupted or restricted. (Think of the increase in oil prices in the 1970s.) Supply-side recessions tend to increase prices, as well as wages and salaries, and they are rarely as severe as demand-side recessions. In a demand-side crisis, goods and services are readily available, but households and businesses do not make new purchases. The resulting glut of unsold goods and unemployed workers reduces prices and wages.
In their regular report issued in March, economists at the OECD discussed how the virus could affect supply chains in China, and lowered their forecast for global GDP growth by just half a percentage point. Although these initial forecasts seem too conservative in hindsight, they were reasonable extrapolations from the historical record. The effects of past epidemics have been concentrated on the supply side of the economy. The most important example was the bubonic plague that first visited Europe in 1348. The Black Death claimed the . The shortage of labor caused famines and, eventually, substantial increases in wages.
At the beginning of April, a group of economists at the University of California, Davis, concluded that similar supply-side effects had followed other major epidemics. Analyzing data from as far back as the 16th century, they found that shortages of labor increased wages and reduced returns on wealth. In other words, epidemics have empowered surviving workers and peasants against their overlords in every era. Likewise, previous studies had found that elevated wages and incomes followed the influenza of 1918. Sickness made labor scarce in major industries, causing shortages of basic commodities, especially coal. Pig iron and steel production were off several percent, due to the lack of coking coal. There was a dearth of copper as well. White-collar workers were affected, too. So few healthy telephone operators had reported for work at the exchanges in New York that only non-emergency calls were permitted north of 59th Street, The Wall Street Journal reported. Good luck getting a call through to Brooklyn.
Like previous epidemics, the economic effects of the 1918 flu were mostly on the supply side. But there were also disruptions on the demand side, which prefigured this year’s recession. In 1918, as today, weddings, funerals, and other public gatherings were banned. Schools, churches and theaters were closed almost everywhere. So were bars, cinemas, dance halls, poolrooms, bowling alleys, soda fountains, and slot-machine parlors in many cities. But the chief fact about Americans in 1918 is that, by modern standards, they were overwhelmingly poor. What money they had, they had to go out and spend to feed and clothe themselves, despite the danger of influenza.
A study conducted by the Bureau of Labor Statistics from 1917 to 1919 found that a typical family in Washington, D.C. spent just $44 a year on entertainment and travel, including $20 for tickets to shows and movies, out of an annual income of about $1,500. The family paid only $14 for personal care. Men probably spent most of that at the barbershop, although the total included items like soap and cologne. Two-thirds of workers brought lunches to work.
The relative scarcity of non-essential businesses could be one reason that many businessmen supported quarantines. The Kansas City Star reported on the efforts of the city’s Chamber of Commerce, controlled by Republicans, to force the mayor to impose more stringent rules. The only opposition came from owners of theaters and cinemas.
All these factors limited the economic effects of influenza. In Chicago, according to the Wall Street Journal, consumer spending was “remarkably well-sustained in all sections,” but especially staples, dry goods, and groceries. François Velde, an economist at the Federal Reserve Bank of Chicago, produced a thorough retrospective on the 1918 epidemic earlier this year, quoting the economists Wesley C. Mitchell and Arthur F. Burns, the future Federal Reserve chairman, who lived through the pandemic. They later described the recession that year as having “exceptional brevity and moderate amplitude.” There was no talk of firms going under, of runs on banks, of panic, or of crisis. Business went on as usual.
Although the 1918 flu was much more lethal than the coronavirus, the economic effects were hardly noticeable. That is because today, the global economy has lurched in the opposite direction—not toward shortages, but toward surpluses.
It is true that there have been shortages of some strategic commodities, like Wendy’s burgers and kettlebells. Meanwhile, tankers were lined up in the Pacific off San Francisco in late April, laden with oil that no one wanted to buy. About 160 million barrels were stored at sea worldwide, a record.
Gasoline fell from $2.58 a gallon in January to $1.88 in April and May. Overall prices decreased 5 percent in the second quarter, according to the Federal Reserve’s preferred measure of inflation. That was the sharpest decline since the 1940s.
While prior epidemics have increased wages, this one has caused mass unemployment. About 15 percent of Americans workers were out of a job in April. Many of the remainder had to choose between joblessness and going to work in potentially infectious air.
The unemployment rate has declined since then, to 6.9 percent according to the latest numbers released on Friday. But that improvement is largely due to the fact that many workers have quit the labor force entirely. Total employment remains about 5.6 percent below February’s level, and G.D.P., according to last month’s figures, is still off over 2 percent after adjusting for changes in prices.
Meanwhile, the number of new infections is increasing again around the country, and governors are imposing renewed restrictions on retailers and restaurants. Yet given shifting, overlapping, and inconsistently enforced regulations, with mayors and county commissioners squabbling over the rules, governmental decisions might be less consequential for the economy than those of individual consumers and business owners about what risks they will accept.
After all, most Americans today have significant discretionary expenditures. Because the economy’s non-essential sector has expanded, the choices of public-health authorities as well as individual consumers during a pandemic have become more consequential.
Spending on the necessities of food, clothing, and shelter accounted for 73 percent of the typical household budget at the time of the 1918 flu. In 2019, the same categories made up just 35 percent of the household budget.
And that total includes big bills at restaurants and bars. Spending on food away from home, which was almost nonexistent in the early 20th century, now nearly equals spending on groceries for the average household.
Education and health care have partially replaced food, shelter, and clothing as household necessities. Spending on education has increased from 0.5 percent at the time of the 1918 flu to 2.3 percent today, and spending on health care has increased from about 5 percent to about 8 percent.
In normal times, education and health care are unavoidable headaches for every family. But the coronavirus has thrown even these sectors into turmoil.
With students staying home, colleges and universities have been unable to collect tuition and housing fees. Hospitals have been forced to postpone all but the most urgent procedures. Employment in health care, which had increased through every recent recession, declined 9.6 percent between February and April.
Instead of spending their money on restaurants or college courses, Americans saved 33.5 percent of their income in April, 24.2 percent in May, and 19 percent in June—by a wide margin, the three highest figures since the Second World War. The average for the past decade was 7.3 percent.
The astonishingly high savings rate is the most important statistic for understanding the coronavirus economy. After paying the bills for food, clothing, and shelter, the typical consumer in 1918 simply did not have that much left to put away. Today, affluence affords consumers the discretion to spend or to save. What they do with those savings will determine how quickly the economy recovers after the pandemic.
In the short term, to be sure, all that saving could be good for the economy. During the Second World War, the last time savings were at this level, rationing forced consumers to save up the high wages they were earning in military service or in armaments factories. After the war, they used their savings to purchase homes, appliances, and automobiles, and to have children and raise them. The resulting boom lasted throughout the 1950s and 1960s.
Then, as now, federal outlays have resulted in increased incomes for many households, while a national emergency has prevented consumers from spending the extra cash. There has been real hardship during the pandemic among those unlucky enough not to qualify for unemployment benefits, but most families did all right financially through the spring and summer, thanks to generous federal aid. Disposable personal income actually increased 9.7 percent in the second quarter. The rate of credit-card defaults, a good measure of middle-class finances, declined.
Americans were so flush during the pandemic that many opened their first retirement accounts. Fidelity reported in August that its customers had opened a third more Individual Retirement Accounts (IRAs) year over year. Contributions increased 22 percent in volume. The money wasn’t just coming from older, affluent clients with comfortable jobs. The increases were still greater among millennials, who are evidently eating less avocado toast.
Investments in retirement accounts likely accelerated the stock market’s recovery. The S&P 500 fell by a third in February and March, but had made up those losses by early August, setting new record highs.
For the economy today, the best we can hope for is that consumers will again find some way of spending their savings, say on a brand-new pick up, a designer handbag, or a family vacation. But there are differences between the wartime economy and the coronavirus economy.
Then, consumers were postponing spending on big-ticket, durable goods, such as cars and dishwashers. Today’s affluent consumers have largely met their needs for durable goods. And services, which have been so important in this recession, can only be consumed in the moment. For instance, to make up for lost time after the pandemic, a family that stopped paying for weekly visits from a house cleaner would have to have the house cleaned twice a week.
Another difference is that in the postwar period, U.S. manufacturers could rely on foreign as well as domestic consumption. The United States benefited from a modest trade surplus for most of 1940s, 1950s, and 1960s, supplying goods and equipment to other nations who would not only emulate American standards of living, but build up manufacturing sectors to rival this country’s.
Today, consumers outside the United States are spending less and saving more. Since at least the turn of the millennium, the world economy has burdened by an excess of saving—what Ben Bernanke, the former chairman of the Federal Reserve, termed a savings glut. The increase in savings due to the pandemic is compounding this existing glut. The trade deficit, which represents dollar-denominated assets saved by foreigners, exceeded $63 billion in July. That was the highest total since the financial crisis of 2008.
As more and more people worldwide find they have enough to meet their immediate needs, they have put away more for themselves in old age and for their children. Pension funds and life insurance companies have become macroeconomic heavyweights.
These institutions, like foreign central banks, consistently turn to the American banking system to provide financial security for their clients. The colossal Japanese entity known as the Government Pension Investment Fund (GPIF), the world’s largest pension fund, invested more than $500 billion in cash-equivalent U.S. Treasury bonds at the beginning of the pandemic, Bloomberg reported.
Bernanke predicted that the savings glut would be temporary. He blamed foreign governments for interfering with currency markets, encouraging their citizens to accumulate U.S. dollars, and argued that as foreign economies recovered from the financial crisis of 2008, global buyers would rediscover their taste for American goods and services. The past few months have put these hopeful predictions in doubt. Not only has the trade deficit increased again, but foreign governments have resumed their interventions in the markets to protect their economies from the expanding crisis. (That’s according to research by Brad Setser, a former Obama administration official now at the Council on Foreign Relations.)
Interest rates tell the story of everything that has changed since the postwar years. High rates reflected the demand for capital to fight the war and to rebuild all that it destroyed. In that context, savings stimulated the economy by holding rates in check, making it easier for households and businesses worldwide to borrow money for new purchases. Today, savings can no longer provide that same stimulus. Interest rates are near zero throughout much of the developed world, a result of the limited need for capital in a richer society that can already satisfy most of its wants.
In a well-known essay titled “Economic Possibilities for our Grandchildren,” the British economist J. Maynard Keynes looked forward to a world in which economic progress had satisfied basic human needs. The coronavirus has proved most of his predictions correct. The economy’s productive power easily meets our most essential demands.
Keynes also predicted that the improving standard of living would not cause unemployment. He wrote that although there would no longer be any need for many traditional occupations in a more productive and technologically sophisticated economy, society would develop new needs, providing new opportunities for displaced workers.
The 20th century seemed to bear out this prediction, too. Technological progress produced not mass unemployment but an astounding variety of inexpensive goods and services. But if the historical data seems to vindicate Keynes’s optimism, that might only be because his own ideas were so influential. High tax rates on the wealthy and expanded public benefits redistributed incomes to those who were more likely to spend, not to save. Policymakers protected organized labor, in part out of feelings of solidarity with the workers of the world, but also because they believed that empowering unions to demand high wages would avoid the perils of overproduction and underconsumption that had bedeviled the early 20th century.
Those protections and benefits have been progressively weakened or eliminated over the past 50 years. In their absence, there is no empirical basis for the assumption that workers displaced by economic progress and technological growth will always find work in new industries. There is no hard evidence that the economy will always create not only new kinds of goods and services, but also the demand for them.
In the coming years, consumers might instead choose to save. They would spend less not out of fear of infection or in compliance with public-health orders, as they have done during the pandemic. Instead, they might have enough of the things that money can buy, preferring the security that comes with accumulated savings. If so, then the economy of the future will share important features with the present crisis, including deflation, zero interest rates, mass unemployment, and, paradoxically, rising incomes.
For the new global middle class, saving for retirement or a rainy day promises freedom from the demands of work and the ups and downs of the market. The desire for that peace of mind seems insatiable, in contrast to the desire for most consumer goods.
Economic growth in the capitalist system has opened up all kinds of possibilities for ordinary people around the world. Yet for them, the most remarkable possibility of all might be the promise of escape from that system’s many uncertainties and anxieties.
It would be premature to predict what the consumers of the future will want. If the pandemic can be contained, there is (as yet) no reason to think that the same policies that worked before to create demand for the capitalist system’s products would fail to do so today. But without a coordinated effort on the part of policymakers worldwide to alleviate excess savings through redistribution and public spending, this recession is just a preview of the economy’s normal state in years to come.
Affluence has changed the rules of the economy. Its unusual reaction to the coronavirus has made that especially clear. Keynes has been cited frequently in the years since the recession of 2008, which resembled the panics of the era before the Second World War in its nature and severity. But if that crisis recalled the past, the coronavirus recession might be the first crisis of the future.
