The Covid-19 pandemic has done tremendous damage to the driving force of the global economy: consumption. As it will likely take a significant amount of time for consumption levels to recover, it will be necessary to complement traditional economic stimulus methods with other approaches to generate enough economic activity to protect the large amount of people who are or will be in very perilous economic and social situations. There is of course no cure-all solution to any large economic crisis, but one thing that will be vital to creating a viable economic path forward is a more efficient use of our natural, built, technological, financial and human resources. We need to do a lot more with what we already have.
The Force of Consumption Expenditure
While the global economy is highly complex and dynamic, it is largely driven by a single force: consumption expenditure. This process can be considered, in terms of economic time and impact, in three ways that illustrate the relationship between payments for goods and services and the expectation of those payments. These two factors form a highly powerful nexus that turn the gears of the global economic machinery.
The nexus of payments and the expectation of payments related to consumption expenditures is a powerful force that turns the gears of the global economic machinery.
The first economically significant component of consumption expenditure is the economic activity that is generated after the purchase and sale of a product or service, which means the use of funds received by a seller for the subsequent payment of other types of goods and services.
When I buy a car at a car dealership, for example, the funds from the sale of that car are used by the car seller to pay his employees and the employees in turn use those funds for other types of expenditures. How quickly, how efficiently and how much of these funds are transmitted throughout the economic system depends on multiple factors, including the portion of those funds that are withheld due to different types of taxes, the funds that are saved vs. spent, what items are purchased and where those items are purchased.
The second economically significant component of the process of consumption expenditure is the point in time that goods and services are actually purchased. This creates a new exchange of funds that can be currently used in the economic system and repay persons who have earlier extended capital. Additionally, these transactions create the expectation that these funds will circulate through the economic system which serves as the basis for short-term expectations of further economic activity.
The third economically significant component of the process of consumption expenditure is expectations regarding future consumption. This is a vital factor in an economy because it plays a major role in determining whether inputs can be obtained for production and converted into finished products and services. If there is no expectation of future consumption, the many types of activities necessary to create finished products will decelerate and this deceleration will immediately cause economic activity to contract.
The distance in time between an expectation of payment and payment is also very important from a cost perspective because it affects the level of risk related to receipt of funds that are vital to finance current and future economic activity; the greater the risk, the higher the cost of funds that act as a bridge until payment is actually received.
The impact of an expected decline in future demand is not limited to the mere loss of potential future growth. As a very large portion of economic activity is financed with credit and a contraction means that many creditors will not get paid or will not get paid on time, this has a negative impact on credit liquidity. Reduced credit liquidity causes credit costs to rise which in turn increases the cost of doing business, creating a two-sided cost whiplash at the exact point in time when future economic activity is expected to fall.
The Impact of Covid-19 on the Global Economy
Covid-19 has had a massive negative impact on the global economy. It is too early to forecast what the final impact of Covid-19 on the economy will be, but in very general terms if we start with the assumption that the value of global GDP in 2019 was around US $86 trillion and the forecasted GDP growth rate for 2020 pre-Covid 19 would have been around 3.0%, this means that if global GDP growth is flat for the entire year it will cause the loss of US $2.8 trillion dollars.
A fall in current year GDP of course, is not the sole measure of the epidemic’s overall economic impact. The trillions of dollars that have been spent or will be spent to prop up economic activity have to come from somewhere and obtaining these funds from an economic system in sharp decline creates its own set of challenging economic issues. Injecting funds into the global economic system, for example, through different types of borrowed money increases country debt-to-GDP ratios and creates downward pressure on credit ratings, negatively affects financing costs and limits the ability to use debt to finance other activities which are also vital for short, medium and long-term economic stability. These issues are discussed in more detail below.
For an overview of how the US government is financing its efforts to contain the impact of Covid 19, see this article https://www.brookings.edu/blog/up-front/2020/03/25/where-is-the-u-s-government-getting-all-the-money-its-spending-in-the-coronavirus-crisis/
Second, the actual and forecasted decline in consumption acts as a massive drag on the many types of investments that are necessary to maintain economic growth and set it up for future expansion and resistance to economic shocks, including making fixed asset purchases, investing in infrastructure and technology, hiring new people and launching new business initiatives. Without these expenditures, goods available for consumption will fall, which will reduce economic activity and cause prices for essential goods that are available for purchase to rise.
Third, Covid-19 has caused massive layoffs and has had a large impact on the many parts of the formal and informal economy where people live from day to day. This economic disruption of street level micro-payment cycles and micro-liquidity very quickly pushes people with often limited if any savings into very difficult economic and personal situations that threaten their well being and the lives of people that depend on their income. This causes many types of social and psychological issues that can not be separated from the larger global economic reality.
Due to the tremendous size of the informal economy, its difficulty to measure and the complicated link between the particants in this part of the economy and other parts of the economic system, it will take a long time to understand and assess the full impact of Covid-19.
Traditional Growth Stimulus Challenges
Governments have several traditional ways to stimulate short-term economic growth. The simplest way is the so-called helicopter money strategy, which simply involves printing more money, but filling the economic skies with cash causes the value of the currency to (literally and figuratively) fall which immediately spikes the cost for anything, from imports to interest payments, whose price tag is in a foreign currency. Further, indiscriminate money drops do not ensure that money will go to where it can be put to best use or where it is most needed.
The second way is to lower interest rates, which encourages people to borrow and then spend those borrowed funds which causes money to circulate through the economy.
There are two challenges with this approach given the current global monetary situation. The first challenge is that global interest rates are already very low and there simply is not a great deal of monetary room to lower them further. Further, the flipside of increased liquidity is inflationary pressure and the rising costs of key items, particularly for segments of the world or population that have little ability to absorb price increases, even for very short periods of time, can be very destabilizing, both economically and socially.
One modern economic invention to get around the 0% interest rate boundary line has been to use negative interest rates which are designed to create saving disincentives. There is a good probability of increased use of negative interest rates in the post-Covid 19 world. Here are some thoughts on this issue. https://voxeu.org/article/negative-interest-rate-policy-post-covid-19-world
Negative interest rates also create economic problems, because interest rate policies that have the effect of causing people to save less puts them in a weaker position to withstand future economic shocks. Further, in economic terms all expenditures are not the same: expenditures on entertainment have less recurring economic impact than expenditures on schools and hospitals. The inefficient circulation of capital greatly weakens future economic growth potential.
The third approach to economic stimulus is through different forms of methods to leave more cash in the hands of state and local governments, businesses and individuals. This can involve direct payments, the reduction of different types of payment obligations, payment rebates and the establishment of different types of loan or equity purchase programs.
A major challenge with these types of efforts is that the money to finance them must come from somewhere and this somewhere is typically through increasing government debt. Increased debt generally raises the cost of debt and these increased costs have to be passed along directly to subsequent users of funds or be effectively subsidized through the reduction of expenditures on other items that are necessary for economic growth.
A third approach is through different types of public projects which can create economic growth in two ways. The first way is that they can generate new jobs so that people can earn money to then purchase goods and services. The second way is that the projects themselves, such as the creation of new roads and bridges, may create different types of business and general life efficiencies that save time and money which can strengthen the economy.
The challenge with this strategy is that these projects typically must be financed through large amounts of debt and, as mentioned above, this has its own economic downside which cannot be ignored when thinking about sustainable economic recovery.
Resource-Efficient Growth
While traditional economic stimulus measures certainly have a role to play in the post-Covid 19 economic world, given the limits of these measures and the different types of weaknesses that they inject into the economic system it is useful to weigh the potential advantages of complementary recovery strategy approaches.
One model that I think is a very useful complement to traditional stimulus and growth measures is one that, rather than heavily depending on facilitating short-term spending increases, makes more efficient use of the many types of resources that we already have. While our economy of course constantly uses different types of resources, many of these resources are not being efficiently or simply wasted. Recovery strategy should involve increasing the economic return on these resources.
Traditional methods of economic growth could be complemented with economic models based on increased resource efficiency which will reduce the need for short-term expenditure-driven growth and increase economic stability.
There are several types of resources that can form the basis of a resource- efficient approach to economic growth and stability, including: (i) physical resources; (ii) infrastructure resources; (iii) technological resources; (iv) financial resources; and (v) human resources.
Physical Resources. Physical resources, such as land, comprise a key component of economic output and also represent a large up-front expenditure for governments, businesses and individuals. Particularly for businesses and individuals, this expenditure often represents a major barrier to creating goods and services and requires third-party financing that may be difficult to obtain or come at a high cost. This cost can create negative returns for significant periods of time which puts pressure on individuals, businesses and the economy as a whole.
One way to make more efficient use of physical resources, to state the obvious, is simply to use them less. Covid-19 has accelerated the realization that is possible to conduct certain types of business activities entirely remotely and this realization can serve as the basis for a broader dialogue regarding what activities can be conducted from home or from areas where land costs are less expensive. This requires, in essence, sector by sector physical resource need audits.
A second way to use land resources more efficiently is by increasingly using rental rather than purchase models that can reduce up-front investment costs. This can allow businesses to become cash positive faster and this cash can be used for different types of value-creating activities.
Land resources can be used more efficiently by decreasing land use requirements and complementing land purchase models with land rental models that accelerate corporate profitability and take pressure off of the economic system.
Infrastructure Resources. A second type of resource is our infrastructure, which means the total built environment where raw economic inputs are converted into different types of economic products before they are sold. A great degree of our built environment has long been not necessary and has become increasingly less necessary as the digital purchase and delivery revolution has grown.
With respect to the infrastructure that is necessary, much of it is not used efficiently and goes for long hours without being used at all. Think about the total amount of space in airports, malls and other public spaces that spend very large amounts of time being essentially completely empty. The global economy constantly bears the cost of this underutilized space.
In addition to moving toward business models which are increasingly infrastructure light, another way to generate increased infrastructure efficiency is through mixed-use models that make better use of space and reduce costs for the people who occupy that space.
One example of this is the concept of “ghost kitchens” or “dark kitchens” that allow multiple restaurant businesses to use the same space in simultaneous or alternate shifts. This has several economic benefits for both the owners and users of space.
For owners, it creates new streams of income and diversifies renter risk, which could allow owners to lower individual rents while receiving more total income and income that carries less aggregate risk. For renters, a shared cost model can reduces their start-up and operating costs and decrease their probability of failure due to a shortage of working capital.
Infrastructure resources can be used more efficiently by reducing infrastructure use, converting infrastructure to uses with higher economic returns and using mix-use models which optimize space use and reduce space costs.
Technology Resources. Technology has a major impact on business efficiency and business efficiency has a major impact on economic growth. Many businesses repeatedly use outdated work methods which reduce business performance and create many types of economic stress.
While the process of technological development will always continue to advance, for the purposes of economic recovery a potential short-term strategy is what can be called lateral technological development. Lateral technological development does not mean advances in technology but rather sharing existing technology with wider groups of people. We need to work harder to create better approaches for sharing ways to do things better with more people. Many highly scalable technology or work approach breakthroughs remain trapped in silos that are invisible to businesses that could operate much more efficiently if they were aware of those breakthroughs.
Lateral technological development does not necessarily mean the implementation of expensive technology which is beyond the economic reach of many people but more importantly low technological ideas and forms of innovation that are not costly and can be quickly absorbed into other operating environments.
A key focus after Covid-19 should be lateral technological development which means not new technological development but rather sharing existing technology with more people.
Financial Resources. Financial resources also need to be used more efficiently to reduce capital costs. In the global financial system, the systematic mispricing of risk creates many types of inefficiencies that have negative economic consequences. This is particularly the case in cross-border financing where financing parties have limited presence or familiarity with the area where financing will be provided. Capital mispricing is an economic timebomb which systematically destroys both value and value creation ability.
Combating this requires, first, advances in risk analysis so that the price of capital more closely matches the actual risk. Second, it should involve the increased used of valuation and profit-sharing approaches where risk is shared rather disproportionately assumed by one party to a financing transaction.
Better use of global financial resources requires improvements in how risk is priced in financing transactions and investments and financing structures where risk is more efficiently shared.
Human Resources. Finally, any sustainable path to economic recovery and progress must involve making better use of what is by far the planet’s most valuable resource: people.
Apart from the millions of people who have lost their economic livelihood in the economic crisis, there are massive amounts of people who are out of the workforce and whose skills and knowledge and not connected to the global economy in any meaningful way.
One example of this is the hundreds of millions of elderly people who have extremely valuable life experiences that are not being shared. It is an economic and social tragedy that so many elderly people spend the last part of their lives in difficult isolation when they have so much to give to the world. Other examples are people in the prime of their professional lives who spend their time in jobs or situations that do not make the best use of their skills.
We need to think more creatively about how to identify the many strengths that all people have and think of ways that those strengths can be shared with other parts of the economy that need those strengths.
The world has many people whose potential, experience and know-how is going unused or is underutilized. We need to be more creative in thinking of ways that these unused economic strengths can be identified and shared with parts of the economy that need them.
Conclusion
While initiatives to incease spending are useful in addressing an economic crises, these approaches often have only short-term benefits and cannot be implemented wthout generating their own negative economic consquences. The impact of Covid-19, and the realization of the global economy’s susceptibility to these kinds of black swan events, means that we need to consider alternative economic stimulus and economic growth approaches that do not only depend on increased consumption expenditure. One approach that has significant potential to help us move down the challenging road of economic recovery is using the resources we already have more creatively, more efficiently and more widely.